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Tuesday, December 8, 2009

Dorothea Lange Squatters March 1937Water supply: Open settling basin from the irrigation ditch in a California squatter camp near Calipatria

Ilargi: In the face of the emptiness exhibited by all parties in Copenhagen this week, here's a dose of reality from Stoneleigh. Renewable energy, sustainability and green shoots in North America? Just talking about it doesn't fly. And the decisions that should have been made to accommodate these initiatives, were not. Not when they were needed. It's too late now. So you can safely ignore anything Obama says in Denmark. It's not going to happen. We've heard for 20 years that it was our last chance. We hear it again today. But the last chance is now long gone. We can't prevent the damage we've done anymore. All we can do is to prepare as best we can to live with the consequences.

Stoneleigh: Today we turn to the topic of our energy future, using my own province of Ontario as an example of what is being attempted in North America, but too little and too late. As renewable energy proponents in Ontario celebrate a Green Energy and Green Economy Act that introduces European-style feed-in tariffs, and talk of this province being entirely powered by renewable energy, I wanted to inject a dose of reality.

Some 85% of Ontario's existing generation capacity will reach the end of its design life within 15 years. While demand has fallen since 2007, and supply has increased with the refurbishment of reactors, creating more of a supply cushion, the easing of the situation leads to a false sense of security. The time horizon for replacing conventional generation is such that a supply crunch looms down the line, even though the coming depression will in some ways buy us some time due to demand destruction.

As with other forms of energy supply, demand collapse for electricity sows the seeds of supply collapse due to lack of timely investment in both supply and maintenance of existing infrastructure.

Feed-in tariffs for renewable power were initiated in Europe, at least partly in order to reduce dependence on Russian energy supplies as much as possible. Eastern Europe knows only too well the strings attached with that kind of dependency, and Western Europe will find out in the coming years. Russia will enjoy yanking Europe's chain, but at least Europe has developed a proportion of its renewable energy potential, which will blunt the effects to some extent. North America was not so foresighted.

A feed-in tariff is a premium price paid for renewable electricity over the long term (typically a 20 year contract) in order to facilitate project financing and stimulate investment. It varies with technology and project size, reflecting the different cost structures of different forms and sizes of generation, in order to provide each with a similar rate of return. It may also vary with resource intensity - paying a higher rate where resource intensity is lower in order to encourage distributed generation and maximize domestic renewable potential.

The approach is to fix a price and allow the market to decide the quantity it is prepared to provide at that price. In addition, much of the cost of connection was covered by the rate base (a system called shallow entry), making investments in renewable power much more attractive. Over the last decade, countries like Germany, Spain, Denmark and the Netherlands have made impressive strides in developing renewable power as a result. They have also built the renewable energy companies that now supply later movers elsewhere.

This is highly counter-intuitive to the comparative advantage mindset which dominates in Northern America, where the cheapest option has been encouraged, no matter what unfortunate long-distance dependencies are created in the process. Until relatively recently renewable generation was contracted for through an RFP process, where a small amount of generation was specified and the lowest bids to provide it accepted. This under-estimated renewable potential, providing a ceiling rather than a floor.

It favoured large projects that could benefit from economies of scale rather than distributed generation. It continued the central station model of generation (large plants at long distances from load) rather than achieving the reduced need for power transmission advantage of embedded generation.

It also favoured only the cheapest technology (big wind) rather than developing a range of options. (Wind has a reasonable EROEI, but it is intermittent and also has a particularly poor match to a load profile that has its peaks on hot, humid and still days in the middle of summer.) Forcing projects to bid in very low meant that many would have been only be marginally viable and were often not built at all.

For something as essential as electricity, this was risky, especially considering that there was also chronic under-investment in the grid infrastructure needed to carry power over long distances. The regions with the most under-developed infrastructure were often the ones with the most renewable energy potential. These were also often distant from load. In addition, the cost of connection fell entirely on the generator, no matter how far downstream the necessary modifications may be or how disproportionate the cost may have been to the size of the project (a system called deep entry). This made many potential projects completely uneconomic.

The successor to the RFP system in Ontario was the Renewable Energy Standard Offer Program (RESOP), which offered one standard price for all generation (11 cents/kWh and 3.5 cents/kWh for non-intermittent power during peak periods) except solar PV (42 cents/kWh). I critiqued the program at TOD:Canada in October 2006; see Standard Offer Contracts - the Future for Renewable Generation?

Once again, the comparative advantage mindset was evident, as only the cheapest renewable generation would be able to compete at a standard price. The program was pitched to homeowners in the full knowledge that, at the rate offered, very small systems would be money losers for their builders. In May 2008, RESOP was suspended, leaving renewable energy companies and potential projects in limbo for 18 months until the launch of the new Feed-In Tariff (FIT) program. All of this was wasting valuable time in which renewable generation might have been developed.

FIT goes much further in the direction of the European legislation it is intended to mimic, but still has many flaws in terms of tariffs, tariff bands, financial assumptions and a broad appreciation of the public interest (properly valuing environmental attributes for instance). There is not enough tariff band differentiation at the smaller end of the scale, and tariffs are often too low for smaller-scale projects to be viable.

Technologies that must create their own renewable fuel, such as anaerobic digestion, have been particularly undervalued considering the benefits they provide in addition to renewable power. The chances of some of the most beneficial technologies being developed under these conditions, in the remaining time before financing becomes impossible, are very low.

There is to be a review in two years, but that review, if it goes ahead at all, will be happening in the middle of a depression. Demand will be depressed, power prices will be very low, private financing will be all but impossible, and it will be politically very difficult to justify special treatment for more expensive power, even though that power will be needed in the long run. In fact, I would be surprised if the contracts now being offered would indeed be honoured for 20 years. Twenty years is an eternity in times of great upheaval, and governments in other jurisdictions have been known to unilaterally rewrite inconvenient contracts in the power sector.

The Ontario grid can only accommodate perhaps 2500MW of renewable generation, which is a small fraction of the projects currently being contemplated by eager proponents. In fact the available capacity has consistently decreased as Hydro One has discovered additional problems with voltage stability on long feeders and reverse flow through some of its transformers.

The Ontario Power Authority expects all the available capacity to be fully subscribed during the first month of the FIT program. Anything coming later would have to wait for additional grid capacity to be developed, and that will not happen in a depression in a province which is already in a financially precarious position before the credit crunch begins to bite here.

There are grand plans for the development of twenty new transmission lines in ten years, which would be ridiculous even in good times, given that it has taken six years for the single Bruce to Milton line just to reach the environmental assessment stage. (And that was under conditions of time pressure, due to a take-or-pay contract with a private company refurbishing a nuclear reactor, for which the government of Ontario will be on the hook for a billion dollars when it fails to build the transmission line in time.)

The distribution investment that would also be necessary hasn't even been planned yet by the over 80 local distribution companies which would be responsible for it. A vast amount of grid investment would be required for the grid even to be able to continue carrying the power it does now, and ambitious expansion plans are pure pie-in-the-sky.

North America could not have copied European achievements in renewable power entirely, even if it had chosen to invest in a timely fashion. The larger geographic area, lower population density, lower feeder loads and under-developed rural grids would have held back development in any case, but much more could still have been achieved than will now be possible in the very limited time still available. North America will thus be left with a much greater legacy of structural dependency on aging conventional infrastructure.

When Peter Cummings and his corporate lending team at HBOS of the UK welcomed leading property entrepreneurs to their hilltop bash at Le Mas Candille hotel during the industry's Cannes jamboree in March 2007, it was difficult to believe that the real estate dream would become a nightmare for the attendees in just a matter of months. Such lavish dinners were just one of the many signs of excess during the heady years of the property boom. Certainly, when the crash came that summer, HBOS found itself among many overexposed to a market undergoing its sharpest fall on record.

Commercial property values fell by more than 40 per cent in markets such as the UK, the US, Spain and Ireland, posing problems for boomtime investments made largely with debt. After a time lag that partly reflects government support, the contagion from these losses is only just beginning to be felt in the global banking system. Further restructurings, defaults and forced sales are inevitable as breaches of loan agreements increase and debt matures - of which the current problems in Dubai, facing a refinancing of $3.5bn (€2.3bn, £2.1bn) of bonds owed by a property group linked to the state, is just the biggest example to date. As with the Gulf emirate's property debt, there are fears of how widely defaults will be felt within the banking system.

"Real estate debt for banks is the pig in the python and the question is when it will be digested," says Patrick Vaughan, a well-known European property investor. "It has looked like it would kill the python." The scale of lending across the world - with an estimated £3,000bn ($4,940bn, €3,300bn) of property debt outstanding in the US and Europe - and the ferocity of the crash has meant institutions have not been able to afford action such as in the early 1990s, when panicked banks dumped distressed property in spite of more moderate market declines.

HSBC estimates that 85 per cent of UK loans made in the past five years are in breach of lending agreements. But banks are ignoring such problems. Instead they are rolling over loans as these near maturity, in the hope that capital values and loan-to-value (LTV) ratios will rise once again to refinanceable levels. Analysts fear banks are storing up losses, particularly for lesser quality property. CB Richard Ellis, a consultancy, estimates that there are about £80bn ($132bn, €88bn) of poor quality property loans in the UK alone, or 27 per cent of all the British sector's debt.

More than £30bn worth are in breach of debt agreements or in default , according to De Montfort University - a tally that has doubled in just six months. "Let me not pretend that it is not something that we are looking at closely. It represents a risk. We recognise that loans with LTVs of over 100 per cent will not be refinanced," says Andrew Haldane, director for financial stability at the Bank of England. "The hope would be that new sources of finance will come to the market before the refinancing dates." The problem becomes acute as borrowers face repayment calls on loans in negative equity that they cannot meet and the financial market cannot afford to replace. Dubai is just the start of refinancing problems.

Much of the debt was generated during the boom of 2001-07, when deal volumes grew on average every year by 38 per cent in the US and 24 per cent in Europe - fuelled by cheap debt that in the case of the US is estimated to have accounted for more than 90 per cent of the $1,400bn transacted. Such sums illustrate the voracious appetite of the real estate sector but also the over-eager lending practices among banks desperate to be involved in the booming property market.

Swept up in the parties, the meals in the south of France and the larger-than-life property tycoons with super-yachts, it was easy for bankers to become overwhelmed. Everyone was making money, simply because there was always another buyer with another bank willing to take the price even further away from the twin fundamentals of property value - rental income and replacement cost. So keen were the banks to give money to the sector that many started to give speculators cash as well as debt, sometimes on structured terms that guaranteed an upside for investors with only the thinnest of "skins" in the game - 5-10 per cent of their own equity perhaps. The "meat" of the money, and the risk, was with the banks. This came to an abrupt end in 2007; finance to the sector was turned off.

In the UK, the lending market was dominated by HBOS and Royal Bank of Scotland, accounting for almost half of the £225bn of net outstanding debt. Naturally, concerns have rested with them as values have fallen. Lloyds Banking Group, the new owner of HBOS, is still taking writedowns on its commercial property book, the legacy of the empire built up by Mr Cummings. Impairment charges of £22.1bn since the end of last year were related substantially to HBOS's real estate spree. RBS was just as keen to offer structured finance, creating a loan book that Stephen Hester, chief executive, is now dealing with in robust fashion. RBS will put £39bn of property loans into the government's asset protection scheme: loans that are either being managed by its workout teams or on a high-risk list.

The APS will prove crucial to keeping such loans afloat. According to Alan Carter of Evolution Securities, government economic stimulus measures have provided "considerable assistance" to the sector. "To be clear, in absolute terms we regard the ongoing indebtedness of the real estate sector as a material risk. However, it is evident that the total meltdown in asset valuations has been avoided, at least for now," he says. Elsewhere, Ireland has created the National Asset Management Agency, which will buy €77bn ($114bn, £69bn) of toxic property loans. The Irish banks were particularly carefree in lending to some of the more risky types of real estate, such as development land. The US government has meanwhile acted to underwrite securitised real estate debt and relaxed the rules on defaults.

Ian Marcus, chairman of European real estate investment banking at Credit Suisse, says: "Real estate is not high on the agenda for government but banks certainly are." Such efforts have helped secure the sector from the mass foreclosure of commercial developments but there are still worries about what happens as more property becomes empty amid the recession, which impacts on the rental income used to service debt. Income will be key for banks, which ultimately are sanguine as long as interest is paid every month. Nick Robinson, the former managing director of corporate real estate for Lloyds, told the FT in September that further losses would be from borrowers having lost income from the failure of their tenants' businesses.

For his part, Mr Marcus says: "Banks may overlook a breach of loan-to-values but they will take action if the interest is not paid. Loans then become impaired and banks will have to account for [them] in a different manner. A serious impact from a tenant default means that any borrower will have significant difficulties in refinancing their debt." The scale of refinancing represents one of the biggest hurdles for property investors and their banks to overcome. About $1,600bn of commercial mortgage debt is estimated to mature in the next five years in the US and a further €366bn in Europe. This represents a massive equity call on the property sector.

In July, a delegation of property financiers used a forum with the Bank of England and Treasury to warn of the threat posed by the lack of finance to cover loans due for renewal. Those in the group estimate that £100bn could be needed to recapitalise the UK property sector, taking it to a sustainable LTV ratio, which means the industry could be in negative equity until 2017. "We've got very excited about the £7bn raised in the UK listed sector but this shows that there is several multiples of that needed to bring loans to safety," says one group member.

Refinancing has not been more of a problem before because banks have been able to roll loans over, even when in breach. In fact, banks can make good money in bad times by boosting margins and fees. Various phrases have been coined to describe the trend - "a rolling loan gathers no loss" quickly became a cliché - but bankers warn that such manoeuvres are not a long-term solution when the need is to reduce exposure to the sector. One banker says that institutions are kicking the can down the road pretty far but "this is ultimately just delaying the problem in the hope that the world will be a better place".

Asustained property recovery would go part of the way to saving the situation, although the rebound is still uncertain. UK commercial property has seen 3.2 per cent price growth since the summer, for example, but that has been based on demand for prime property. So-called secondary property - the majority of the market - is still a problem. "Banks are going to struggle in particular to refinance secondary property where values have fallen steeply until the market recovers," says Max Sinclair, who co-heads the UK division of Germany's Eurohypo.

The chief executive of one leading property company says: "The banks are terrified, as they cannot afford the provisions. They simply can't sell me something at 60 per cent [of] book value as they can't deal with the losses, and I won't buy it for a penny more." There will be solutions, with banks exploring exit routes ranging from joint ventures to establishing funds and real estate investment trusts. Developers are taking on their sites. It will help that lending is again very profitable, given the high margins and fees on property generally being sold below long-term value. The other banking adage - that good loans are made in bad times - will be true for those who still have the appetite.

Indigestion at some of the larger banks could continue for many years to come, however. Nick Leslau, chief executive of Max Property and a veteran investor, says: "I was buying distressed property from the 1990s crash a decade later. This time is worse. It will be a long process." It could certainly be for the many former clients of HBOS, given difficult years ahead under the gaze of the bank's 200-strong restructuring team. Mr Cummings departed in January and relationship banking has become workout planning. The parties in the south of France are a distant memory.

Default to disposal: Simon Halabi has become one of the most prominent casualties of the crash to date, having seen a portfolio once valued at £1.8bn ($3bn, €2bn) fall into default and now head swiftly for disposal. Through offshore family trusts, Mr Halabi's Buckingham Securities amassed a nine-building London portfolio including the Aviva Tower and JPMorgan's offices on Victoria Embankment. A £1.15bn loan securitised by Société Générale at the peak of the market was declared in breach and then in default after the portfolio value dropped to £929m.

Ilargi: John Mauldin says the US will never get to a $2 trillion deficit, since the markets won’t finance it. The US won’t hyperinflate either, and gold won’t go to $15,000. The bond market won’t let it happen. Sound familiar?

Citigroup is racing against the clock to convince US authorities that it be allowed to repay $20bn of bail-out funds, with insiders and regulators arguing that unless the bank acts in the next 10 days it will have to wait for more than a month. The short window for a decision on the repayment of funds from the troubled asset relief programme raises the stakes for Citi in its quest to free itself from the shackles of the government, which also owns a 34 per cent stake in the lender.

Separately, the Kuwait Investment Authority, the Gulf state’s sovereign wealth fund, has made a $1.1bn profit after selling its entire 5 per cent stake in Citi for $4.1bn – less than two years after acquiring preferred shares in the ailing bank during the financial crisis. The sale earned the sovereign wealth fund a 37 per cent return on its investment. Citi’s need to pay back the Tarp funds has been heightened by last week’s surprise announcement that Bank of America had raised $19.3bn to repay $45bn. That move left Citi and Wells Fargo as the only two big banks that have yet to repay Tarp and remain subject to the strict limits on compensation and operations that accompanied last year’s government cash injections.

People close to the situation said that unless Citi could launch the capital-raising effort required to pay back Tarp by the middle of next week, it would become practically impossible to do so until after it reports year-end results in mid-January. Lawyers said it was not technically impossible to raise capital between the end of a quarter and the announcement of results but added that disclosure rules could make it difficult, especially for a company as complex and geographically diverse as Citi.

Citi’s executives have been lobbying Washington to be allowed to repay Tarp, arguing that the bank has cash reserves of more than $240bn and its financial performance is improving. However, Citi’s situation is further complicated by the US government stake. People close to the situation said the government was willing to co-ordinate a sale of at least part of its stake with Citi’s own capital-raising but the tight timing – and the authorities’ lingering concerns over the bank’s health – might delay that.

Citi declined to comment but insiders acknowledged that unless it could launch a share offering by December 14 or 15, it would probably have to wait until at least late January. BofA’s ability to raise $19.3bn – more than its $18.8bn target – in one day at a slight discount to the previous closing price underlined investors’ confidence in the ability of banks to rebound, especially when free from government restrictions.

The Kuwait Investment Authority, the Gulf country's sovereign wealth fund, said Sunday it sold a $4.1 billion stake in Citigroup Inc. making a profit on the deal. The fund, also known as the KIA, said it made a $1.1 billion profit from the sale, or a 36.7% return on its investment, according to an emailed statement. "The authority converted its preferred shares to common shares following negotiations with the bank's administration, selling all of the shares for $4.1 billion," the statement said.

The KIA invested $3 billion in Citi and another $2 billion in Merrill Lynch & Co. in 2008 as Wall Street lenders turned to outside investors to replenish capital hit by subprime-mortgage losses in the U.S. Sovereign wealth funds are unwinding their investments in Western banks after buying big chunks of lenders when share prices hit rock bottom at the height of the global financial crisis. "At the end of the day, sovereign wealth funds are just institutional investors that look to make returns for their shareholders and the KIA found an opportunity to do just that," Hani Kablawi, a co-chair of the sovereign advisory board at Bank of New York Mellon Corp., said in a phone interview.

Kuwait's exit from Citi comes as rival Gulf sovereign wealth fund, the Abu Dhabi Investment Authority, may have to overpay on about $7.5 billion worth of the Citi's shares it's committed to buy at $31.83 a piece in a deal struck two years ago. The United Arab Emirates-based investment fund, also known as ADIA, committed in November 2007 to pump billions into Citi in return for an 11% dividend up to March next year when it has to start buying the bank's common stock. The bank's stock traded in New York closed at $4.09 last week.

Both the KIA and ADIA helped rescue Citi, which turned to the U.S. Treasury twice for infusions of capital, which ultimately left the U.S. government owning 34% of the bank. For a time in March, its stock traded below $1 a share. The Government of Singapore Investment Corp. said in September it made a $1.6 billion profit by selling about half its stake in Citi since converting its holdings from preferred shares to ordinary shares earlier in the month. Saudi Arabia's Prince Alwaleed bin Talal remains one of Citi's largest individual investors since he helped rescue the bank from near collapse in the 1990s.

Gulf sovereign wealth funds, flush with petrodollars from a six-year oil rally that ended in 2008, poured billions of dollars into Western lenders last year as they ran in trouble. The Qatar Investment Authority, the sovereign wealth fund of the world's largest liquefied natural gas exporter, sold in October a £1.4 billion ($2.3 billion) stake in British bank Barclays PLC, making a profit of about 610 million pounds.

The Qatari authority, which continues to hold about 7% of Barclays' shares, is the second sovereign wealth fund to exit the British bank after Abu Dhabi made about 1.5 billion pounds when it sold the bulk of its Barclays stake in June. The KIA is one of the oldest and most experienced of a handful of Middle East government investment funds, with assets estimated at more than $200 billion. Its investment in Citi had drawn criticism from Kuwaiti lawmakers fearing big losses for the nation's overseas wealth.

The white knights that came to the rescue of banks during the financial crisis are going home, with their pockets full of bounty from their good deeds. In less than two years, many of the biggest overseas government investment funds, known as sovereign wealth funds, have reaped huge gains from bailing out financial institutions, and in turn, the global financial system.

In the latest announcement, Kuwait’s sovereign wealth fund said on Sunday that it had booked a $1.1 billion profit on the stake it took in Citigroup in January 2008. That equals a 37 percent annualized return on its initial $3 billion investment. Other sovereign wealth funds — including those backed by the governments of Singapore, Qatar and Abu Dhabi — have also recently cashed out stakes in foreign banks for comparably large gains.

The hefty returns highlight how some savvy government funds have been able to profit from the financial crisis, even as most ordinary investors have been pummeled by billions of dollars of losses. It also calls into question whether such funds will act as long-term investors, as many initially suggested, or merely short-term profiteers. Many sovereign funds invested in the early days of the crisis as banks scrambled to find investors willing to plow in money and exacted lucrative terms. (Swings through Asia and the Middle East were so common that bankers coined the phrase "Shanghai, Mumbai, Dubai, Goodbye" to describe their fund-raising tours.)

But as financial stocks continued to plummet last year, the so-called smart money supplied by foreign governments no longer looked so sure. Now, as bank shares have rebounded faster than most analysts had projected and governments face internal political pressure at home, the funds are racing to lock in gains. "They didn’t panic into selling at the bottom of the market," said Mohamed El-Erian, chief of Pimco. "And now they can sell." GIC, an investment arm of Singapore’s government, said in September that it turned a $1.6 billion profit by selling about half of its stake in Citigroup.

In June, the International Petroleum Investment Company, which is wholly owned by the Abu Dhabi government, said it would sell a big part of its investment in the British bank Barclays, making a profit of roughly £2 billion on a £2 billion investment. In October, the Qatar sovereign wealth fund said it was selling a part of its stake in Barclays, also at a healthy profit. Mr. El-Erian said data was limited on the specifics of how the big sovereign wealth funds have fared through the crisis. Norway, one of the few such funds that provides regular data and has invested in financial firms through its general financial investments, has reported that it is having a strong year.

The great unraveling by foreign governments may put additional pressure on the United States government to begin exiting its bank investments, too. Bank of America said last week that it expected permission from regulators to soon repay the $45 billion in taxpayer money it received. Citigroup, in which the government holds $20 billion of preferred shares and nearly a 34 percent ownership stake, has made paying back the government a priority but has not reached a deal with the Treasury Department for repayment.

Of course, not every bank investment has been a winner. The China Investment Corporation saw its $3 billion investment in the Blackstone Group turn south, especially after the firm’s initial public offering did not perform well. Temasek Holdings, another sovereign wealth fund backed by the government of Singapore, replaced its leadership team and overhauled its investment strategy after big bets on Barclays and Merrill Lynch did not pan out. The Abu Dhabi Investment Authority has had a similar experience with its early investment in Citigroup.

Still, the decision by the Kuwait Investment Authority to sell its stake in Citigroup came as somewhat of a surprise. It invested about $3 billion in Citigroup in January 2008 alongside other prominent investors, including Adia, the GIC, the New Jersey Division of Investment, and Citigroup’s founder, Sanford I. Weill. Around the same time, the authority put $2 billion into Merrill Lynch, the troubled brokerage house taken over by Bank of America last year.

In September, the Kuwait Investment Authority said that it had no immediate plans to sell its investments in Citigroup or Bank of America because its financial strategy was based "on a long-term vision." The government investment fund had agreed to convert its preferred shares of Citigroup into common stock. But on Sunday, it announced that it had sold that stake for about $4.1 billion, producing the $1.1 billion gain. Citigroup’s ordinary shareholders, however, have not fared as well during the last two years. The company’s stock was trading above $25 a share in January 2008 when Kuwait took its stake; it is now trading at about $4 a share.

Ilargi: Criticism of recent unemployment numbers continues unabated. It’s starting to be entertaining. There's a lot of disbelief out there. Dave Rosenberg notices the same I did: the ISM reported a contracting services sector mere days before the BLS saw it expand.

In our opinion, the answer is no. This was the eighth time we have seen the unemployment rate go down in a month since it bottomed back in October 2006. Nothing moves in a straight line. The peak still lies ahead of us. In the prior cycle, the unemployment rate bottomed on April 2000, at 3.8% and peaked at 6.3% on June 2003. During that time, we saw the jobless rate fall five times. In the early 1990s cycle, the unemployment rate actually fell no fewer than six times.

Declaring victory because of a one-month wiggle can be dangerous. Especially since a key reason why the jobless rate dipped was because the ranks of discouraged workers who exited the labour force due to grim job prospects jumped 60,000 to 357,000 last month. As for the -11k print on Friday’s headline payroll report, unadjusted, the number was +80k, which therefore goes down as the third softest November reading in the past 18 years. November is normally a month where between 300k and 500k workers find a job before the seasonal adjustment kicks in. Something to keep in mind.

It’s remarkable nobody talks about this. The big surprise in the payroll data was the service sector component; it rose 58k. But we know from the ADP report that service sector employment fell 81k, which was fractionally worse than the 79k decline in October. Such a discrepancy has occurred less than 3% of the time in the past, and each time, the following month after the big gap, there was a convergence ... with headline nonfarm payrolls swinging 100k lower on average, which would imply a 111k decline when December’s figure comes out.

Also take note that the +58k print in the service sector payroll was completely at odds with the 41.6 reading in the ISM non-manufacturing employment index in November — a figure that in the past was consistent with a -192k tally in service sector payrolls and never before aligned with a positive number. Go back to the 2001 recession, and the worst ISM non-manufacturing jobs subindex was 43.9 (right after 9/11) and here we published a figure that was more than two points shy of that!

So as we wonder how the headline number could only be -11k on Friday, there were some very lumpy increases in some very non-cyclical segments of the economy: • Administration/waste management +87k • Health/education +40k • Government +7k

The rest of the economy shed 145 jobs and the declines were spread across nearly 60% of the industrial base from retail, to transports, to manufacturing, to construction. For some reason, we didn’t see this dichotomy mentioned anywhere in the weekend press. The Canadian employment data, while robust on the surface, also had its own peculiarities — like half the gain being in education (more teachers in November?); wages declining (even with a lower unemployment rate?); and the workweek contracting (more bodies, fewer hours — reverse of what we saw stateside). We would have to think that Mr. Carney is going to look through this spurious piece of Household employment this week, especially since GDP growth is already coming in well below official forecasts.

There is a case to be made that we will go through a continuation of the good news on the job front, and the question is going to be how the equity market deals with the new normal of no more job destruction and no more cost containment. Pricing power better come back along with what could be a temporary — underline temporary — jobs spurt due to: • A skew from the seasonal adjustment factors caused by the massive losses from November 2008 to May 2009. • Obama hiring 1.5 million people during Q1 to conduct the census (it will last into April).

We are about to see the President (tomorrow, in fact) announce a slate of job creation measures including tax credits for new hiring and additional infrastructure spending as well as more financial aid to state and local governments. Based on what the automakers are saying, we should be seeing a 10% sequential rise in motor vehicle production in the first quarter as well. The November employment report showed there to be upward revisions, a hefty gain in temp agency employment and a healthy increase in the workweek — all leading indicators and the first time we have seen such a trio in three years.

That said, we think that once we get beyond the census effect post first-quarter, employment is likely to weaken again and we continue to see new highs ahead for the jobless rate. Economists who continue to use the experiences of the post-WWII recession, which was a mere correction in GDP in what was a secular credit expansion, are doomed to failure, as so many were heading into the collapse of late-2007, 2008 and early 2009.

So amazing they’re verging on the (perish the thought) unbelievable, according to some analysts.

The consensus forecast among analysts for the November job loss had been -130,000, with even the relatively optimistic and sometime-clairvoyant economists at Goldman Sachs forecasting -100,000. The official data showed a fall of just 11,000 — about 90 per cent fewer than the consensus estimate.

Thus, perhaps, ING’s Rob Carnell pouring some cold water on the numbers on Monday:

In our view, the only potential fly in the ointment of this labour report is how believable it is. Payrolls has been making very, very slow progress in recent months, and such a dramatic turnaround will raise eyebrows, and may not be taken at face value by many. An improvement in the payrolls series always looked on the cards from last month. But most of the labour market data in the run up to this release had been consistent only with a very small step forward, so we may need to see this backed up again next month before concern about the labour market can really be filed away as ‘last year’s worries’.

Further support for the turnaround in the employment sector came from hours worked - which gained 0.2 hours on the month, helping to push weekly earnings higher. Hourly earnings continued to decline and now stand at only 2.2% YoY. But they lag employment growth by up to two years, so it would be a bit early to expect much improvement here.

In contrast to the weak November non-manufacturing ISM survey’s employment index yesterday, which registered only a small increase from very low levels, the service sector apparently generated 58K jobs in November. Strong gains in temporary help jobs (usually a retail sector phenomenon) were a big factor here, so anecdotal reports of relatively soft retail sales in November may see some of these jobs rapidly removed after the end of the year, once sales have finished (if demand does not improve)

We are also slightly curious about the apparent surge in government jobs, which on revision have risen by more than 50K in the last two months. When state and local finances are in such a deep mess, even the Obama fiscal package is unlikely to have generated this rapid turnaround in the public sector. More believably, goods producing, construction and manufacturing jobs all saw continued large falls.

Sanmina-SCI, the supplier of electronics services, is loaded with debt and in each of the last eightyears has lost money. Its shares have risen more than 600 percent since the stock market rally began on March 9. Wal-Mart Stores, the discount retailer, has lots of cash on its balance sheet, has very little debt and has consistently turned a profit. Since March 9, its shares have gained just 14 percent.

The disparate treatment meted out to these two companies by the stock market highlights an unusual and, in some ways, worrisome phenomenon: to an extent not seen in decades, shares of companies with weak balance sheets have been soaring, generally outperforming firms with stronger fundamentals. In part, this is a consequence of the terrible pummeling given to riskier assets of all kinds during the worst months of the financial crisis. Shares of companies that were deemed to be weakest were hit the hardest. It’s only natural that they would bounce back the most at the first hint that financial disaster had been averted.

But the performance gap between the weak and the strong has rarely been as pronounced as it has been since March’s market lows. The extreme outperformance of the more speculative stocks could make them vulnerable to another market shock. Ford Equity Research, an independent research firm based in San Diego, rates stocks’ financial quality based on a number of factors, including a company’s size, debt level, earnings history and industry stability. All told, Ford Equity follows more than 4,000 stocks. Those in the bottom fifth of its ratings — including Sanmina-SCI — produced an average stock market return of 152 percent from the beginning of March to the end of November, according to an analysis conducted for The New York Times.

The stocks in the highest quintile for quality — including Wal-Mart — produced an average gain of 66 percent over the same period, or roughly 85 percentage points less. That is the biggest disparity over the first nine months of any bull market since 1970, which is the first year for which Ford Equity has quality ratings. Historical comparisons to bull markets prior to 1970 must rely on a proxy for financial quality, and perhaps the best available is market capitalization. Not all large-cap companies are financially healthy, of course, and not all small caps are weak. But, historically, as a group, the difference between the large- and small-cap sectors has proved to be roughly correlated with the disparity between high- and low-quality stocks.

Since the March lows, for example, according to Ford Equity, the 20 percent of stocks with smallest market capitalizations have on average outperformed the largest 20 percent by 72 percentage points — only slightly less than the 85-point disparity between the lowest- and highest-quality issues. By contrast, in the first nine months of all bull markets since 1926, the average outperformance of the small-cap sector was just 21 percentage points, or less than one-third as much as the disparity over the last nine months, according to calculations by The Hulbert Financial Digest.

Only once since 1926 have the first nine months of a bull market produced a gap greater than this year’s. That was in the bull market that began in February 1933, in the middle of the Great Depression, when small caps outperformed large caps by an incredible 196 percentage points. How can we explain the current extreme performance disparity? The federal government’s stimulus program is the main cause, in the view of Jeremy Grantham, the chief investment strategist at GMO, a money-management firm based in Boston.

Mr. Grantham said in an interview that by temporarily reducing the danger of incurring risk, the government had effectively encouraged huge amounts of risk-taking in financial markets. "The sizable disparity of junk over quality should not have come as a big surprise," he said, "given how massive the government’s stimulus has been." As an unintended consequence, Mr. Grantham said, high-quality stocks today are about as cheap as they have ever been relative to shares of firms with weaker finances. "It’s almost a certain bet that high-quality blue chips will outperform lower-quality stocks over the longer term," he said.

I noted last week that from a Bayesian perspective, I would estimate a probability of nearly 80% that we will observe a second round of credit losses coupled with a market plunge in the coming year or so. That doesn't imply an all-out “crash,” but more likely a retreat similar in size to what we have often observed following other post-crash rebounds (about -28% on average).

Of course, from the standpoint of compounding, a 28% decline converts a 60% gain to a more modest 15% net advance, so even without an outright “crash,” it would not be surprising to see the majority of the gains since the March low wiped out. Most likely, we may see a few more years of sideways movement after that, as the economy absorbs the full weight of adjustment to the deleveraging of bad debt and massive increase in government liabilities that we have on our hands.

Suffice it to say that I do not anticipate a V-shaped recovery, and while the stock market may very well recover faster than the rest of the economy, I don't expect durable market gains until after the second wave of losses shakes out.

On the subject of credit delinquencies, the latest report by Trepp (which provides independent research on commercial mortgage-backed securities) indicates that delinquencies on multifamily CMBS loans rose to 8.78 percent in November, up from 7.66 percent the previous month. Commercial delinquencies in retail, industrial and office loans increased as well. The largest jump in delinquencies was in the hotel sector, where the delinquency rate shot to 14.09 percent, from 8.67 percent in October. The data from the banking sector also shows no abatement...

The Obama administration, buoyed by a resurgent Wall Street, plans to cut the projected long-term cost of the Troubled Asset Relief Program by more than $200 billion, in a move that could smooth the way for the introduction of a new jobs program. The White House and leaders in Congress are debating whether to use any of the remaining TARP funds for other domestic efforts, such as a jobs bill. Congress authorized $700 billion for the program during the height of the financial crisis.

The Treasury now estimates that over the next 10 years TARP will cost $141 billion at most, down from the $341 billion the White House projected in August. The reduction stems in large part from faster-than-expected repayments by some of the nation's largest banks, as well as less spending on programs to help shore up the financial sector. The government's efforts appear to have helped stabilize the financial sector, and banks have already repaid the Treasury about $70 billion. Bank of America Corp. has said it will return its $45 billion investment as early as this week, and the government now expects total repayments to reach as much as $175 billion by the end of next year. Altogether, it invested $204 billion in 690 firms. The Treasury has also collected more than $10 billion in interest and dividend payments from firms in which it has invested.

The lower-than-expected TARP losses could help the White House tap remaining funds for a jobs program because the revised estimates will help bring down the projected federal budget deficit since the White House will be able to assume less spending associated with the program. The White House has been under pressure to tame the $1.4 trillion budget deficit, which has ballooned as the U.S. borrows vast sums of money. But with unemployment at 10%, the administration is also under pressure to find ways to create new jobs. Lowering deficit projections could help alleviate concerns that a new jobs bill would further inflate the deficit.

President Barack Obama is expected to raise the idea of using repaid TARP funds for a jobs bill in a speech he plans to give on Tuesday. On Friday, White House press secretary Robert Gibbs acknowledged that repaid bailout money is "certainly being looked at" for a jobs bill. Many Republicans are opposed to recycling TARP funds for a jobs bill, calling instead for the money to go toward reducing the deficit. House Minority Leader John A. Boehner (R., Ohio), on Bloomberg television Friday, called it "the worst idea" he had ever heard.

After months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program, its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10-month-old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet.

"The banks are not doing a good enough job," said Michael S. Barr, assistant Treasury secretary for financial institutions, in an article published last Sunday in The New York Times. After the government spent hundreds of billions of dollars bailing out banks, the Obama administration rolled out the $75 billion loan modification plan to show its support for beleaguered homeowners. But if the proof of the pudding is in the eating, homeowners are going hungry.

A stalled loan modification plan might not be worrisome if the foreclosure crisis were abating. Yet at the end of September, a record 14.4 percent of borrowers were either in foreclosure or delinquent on their mortgages, the Mortgage Bankers Association reported. It’s time for the government to acknowledge the flaws in its program and create one that might actually succeed. Only then will the supply of homes for sale, and the pressure on prices associated with that overhang, be reduced.

The Treasury program has decided to tackle the delinquent mortgage problem by reducing the interest rate on eligible borrowers’ loans to a level that makes monthly payments affordable. But how it calculates affordability is one of the program’s major flaws — at least that’s the view of Laurie Goodman, senior managing director at Amherst Securities Group and head of mortgage strategy at the firm. Her research shows, for instance, that 70 percent of modifications involving only interest rate cuts, rather than reductions in the principal borrowers owe, have failed after 12 months. The Treasury program is likely to have similar outcomes.

According to government investigators, the average monthly mortgage payment for a borrower under early plan modifications fell by 34 percent. Assessing for possible success under these terms, Ms. Goodman analyzed past redefault rates on modifications that cut payments by 34 percent. She found that 65 percent of borrowers fell back into delinquency. The terms of loan modifications also make them especially failure-prone because the government calculates "affordability" (how much mortgage debt a borrower can actually manage) in a highly unusual way — raising serious questions for the housing market over all and for the program’s effectiveness for borrowers.

Moreover, investors in first liens, like pension funds and mutual funds, also get beaten up in this process. For example, in devising what it considers an affordable mortgage payment, the program doesn’t account for all of a borrower’s debts — the first mortgage, second lien, credit card debt and automobile payments. Instead, it calculates affordability using only the borrower’s first mortgage payment, insurance and property taxes. As a result, what may look like an affordable mortgage payment under the Treasury plan quickly becomes onerous when other debt is added. While the government may ignore a borrower’s second lien and revolving credit obligations, you can be sure the creditors that extended those loans will not. Redefaults seem a likely result.

Another flaw in the program, Ms. Goodman said, is its failure to consider how much equity, or negative equity for that matter, the borrower has on a property. She said that while many analysts contend that unemployment is the major predictor of mortgage defaults, her research shows that negative equity, when a borrower owes more on the home than it is worth, is actually the driving force.

Ms. Goodman recently compared the experiences of prime mortgage borrowers living in areas with an 8 percent unemployment rate. Those with at least 20 percent equity in their properties were falling two payments behind for the first time at a rate of only 0.22 percent a month. But the same 60-day delinquency rate for those who owed at least 120 percent of the value of their homes was 1.46 percent a month.

"We have kicked the problem down the road through modifications that don’t work," Ms. Goodman said in an interview last week. "You have to address the second liens and ultimately have some type of principal write-down program so borrowers can re-equify." Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks — the very same companies the Treasury is urging to modify loans that they service — have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets.

Say a troubled borrower has a first mortgage owned by a pension fund in a securitization trust and a second lien held by the bank that services the loans. The servicer is happy to modify the first mortgage under the Treasury program because the pension fund holding that loan takes the biggest hit while the second lien is untouched. This hurts the investor who holds the first mortgage and the borrower, who must pay off the second lien, which typically has a significantly higher interest rate.

The result? Yet another conflict of interest enriching financial companies while impoverishing investors and consumers. An interesting data point: when banks do own all the mortgages on a property they seem to see the merit in principal reduction modifications. Studying second-quarter government data, the most recent available, Ms. Goodman found that when banks owned the loans, 30.5 percent of modifications reduced principal balances. When they service someone else’s loan or hold a second lien on the property, they rarely allow principal reductions.

Of course, cries of moral hazard will erupt if borrowers get large cuts in their principal balances. Rightly so. Why should those who took on too much debt to buy too much house get rescued when those who were prudent go unrewarded? But doing nothing also has hazards, the most obvious being continuing foreclosures, which nobody wants, and further declines in real estate prices that will hurt homeowners as well as investors.

Gold’s best year in three decades has yet to match the returns of an interest-bearing checking account for anyone who bought the most malleable of metals coveted for at least 5,000 years during the last peak in January, 1980. Investors who paid $850 an ounce back then earned 44 percent as gold reached a record $1,226.56 on Dec. 3 in London. The Standard & Poor’s 500 stock index produced a 22-fold return with dividends reinvested, Treasuries rose 11-fold and cash in the average U.S. checking account rose at least 92 percent. On aninflation-adjusted basis, gold investors are still 79 percent away from getting their money back.

"You give up a lot of return for the privilege of sleeping well at night," said James Paulsen, who oversees about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. "If the world falls into an abyss, gold could be a store of value. There is some merit in that, but you can end up holding too much gold waiting for the world to end. From my experience, the world has not ended yet." While gold’s nine-year bull market is attracting hedge-fund managers John Paulson, Paul Tudor Jones and David Einhorn, strategists and fund managers at Barclays Plc, HSBC Holdings Plc, SCM Advisors LLC and Brinker Capital Inc. say buy-and-hold investors shouldn’t always own bullion. The accumulation of gold is part of a record $60 billion Barclays estimates will flow into commodities this year.

The SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has amassed more metal than Switzerland’s central bank, spurred by a plunging dollar and concern that the at least $12 trillion of government spending to lift economies out of the worst global recession since World War II will spur inflation. The collapse of U.S. real estate in 2007 froze credit markets and left the world’s biggest financial companies with $1.72 trillion of losses and writedowns, data compiled by Bloomberg show.

The U.S. Mint suspended production last month of some American Eagle coins made from precious metals because of depleted inventories. The U.K.’s Royal Mint more than quadrupled production of gold coins in the third quarter. Harrods Ltd., the London department store, began selling gold bars and coins for the first time in October. Those sales contributed to a 30 percent rally in gold this year, beating the 25 percent gain in the S&P 500, with dividends reinvested, and a 2.4 percent drop in Treasuries. Investors bought gold as the U.S. economy, the world’s biggest, shrank 3.8 percent in the 12 months ended in June, the worst performance in seven decades. Gross domestic product expanded at a 2.8 percent annual rate in the third quarter.

A weakening dollar also contributed to bullion’s longest winning streak since at least 1948. The U.S. Dollar Index, a measure against six counterparts, dropped in six of the last eight years, including a 6.6 percent decline in 2009, bolstering demand for a hedge. Gold fell 1.6 percent to $1,143 an ounce by 11:08 a.m. in London. Before today, the metal had risen 32 percent this year, the most since 1979. Buy-and-hold investors may not have done so well. One dollar put into a U.S. checking account in 1983 would be worth at least $1.92 today, based on annual average interest rates from Bankrate.com. The Federal Reserve target rate from 1980 to 1982 was 8.5 percent to 20 percent. Banks were paying 5 percent on the accounts in January 1981, according to a report in the New York Times.

The S&P 500 returned 2,182 percent from the beginning of 1980 through the end of the third quarter this year, according to data compiled by Bloomberg. The calculation assumes dividends reinvested on a gross basis. Treasuries returned 1,089 percent through the beginning of this month, according to Merrill Lynch’s Treasury Master Index. "Gold is a useless asset to hold long term," said Charles Morris, who manages more than $2 billion at HSBC Global Asset Management’s Absolute Return fund in London. "I’m not a gold bug who believes that you want to own this thing in your portfolio at all times. We should own it when the going is good, and the going right now is great."

Those who bought gold when it reached a two-decade low of $251.95 in August 1999 have seen a 387 percent return, more than four times the 82 percent gain in Treasuries. An investment in the S&P 500 lost 0.4 percent through the end of last month. Interest on checking accounts shrank to 0.14 percent this year from 0.89 percent in 1999. Since the S&P 500 peaked in October 2007, investors in the index lost 25 percent, holders of Treasuries made 16 percent and gold buyers are up 64 percent.

"There are people that just stayed in very conservative investments in cash and government bonds," said Larry Hatheway, global head of asset allocation at UBS AG in London, who recommends investors hold about 1 percent of their assets in bullion. "Surely they would have been a lot better off being in gold." Buying bullion at $35 when U.S. President Richard Nixon abandoned the gold standard in 1971 would have given a 35-fold return, about the same performance as the S&P 500.

Gold will average $1,070 next year, according to the median in a Bloomberg survey of 19 analysts. The metal may jump to $2,000 in the next five years, said HSBC’s Morris. Ian Henderson, manager of $5 billion at JPMorgan Chase & Co., said he’s adding to his gold-related holdings because of "the momentum behind it." Jim Rogers, the investor who predicted the start of the commodities rally in 1999, has said bullion will surge to at least $2,000 over the next decade. "Our sense is that this bubble is more at the beginning stages than on the brink of collapse," said Thomas Wilson, head of the institutional and private client group at Brinker Capital in Berwyn, Pennsylvania, which manages about $8.5 billion.

Touradji Capital Management LP, the New York hedge fund founded by Paul Touradji, bought 2.23 million shares of Barrick Gold Corp., the world’s biggest producer, during the third quarter, according to a Nov. 13 filing with regulators. The stake, Touradji’s biggest equity holding, is worth $95 million. Paulson & Co., the hedge-fund firm run by billionaire Paulson, will start a gold fund on Jan. 1 investing in mining companies and bullion-related derivatives, according to a person familiar with the plan. Einhorn, who runs New York-based Greenlight Capital Inc., told a presentation in New York in October that he’s buying gold to bet against the dollar.

Paul Tudor Jones, in an Oct. 15 letter to clients of his Tudor Investment Corp., said gold is "just an asset that, like everything else in life, has its time and place. And now is that time." Central banks will become net buyers of gold this year for the first time since 1988, according to New York-based researcher CPM Group. India, China, Russia, Sri Lanka and Mauritius have all added to their reserves. Gold should be held when governments cease to function and currencies are worthless, or when inflation is surging, said Brian Nick, a New York-based investment strategist at Barclays Wealth, which manages $221 billion. He doesn’t recommend increasing gold holdings, which are a "very small" part of commodity allocations.

Inflation has yet to accelerate. U.S. consumer prices will rise 2 percent next year, the smallest expansion since 2002, according to the median estimate of 63 economists surveyed by Bloomberg. Prices will shrink 0.4 percent this year. "People have this knee-jerk reaction and say that you want gold as a hedge against inflation," said Maxwell Bublitz, who helps oversee $3.5 billion as the chief strategist at San Francisco-based SCM Advisors LLC and recommends investors hold no more than 5 percent of their assets in the metal. "But the history of gold in regard to inflation shows that it’s not a great hedge."

Investors seeking to protect themselves against inflation should buycommodities, which are cheaper than gold, said Wells Capital’s Paulsen. Copper, after more than doubling this year, is still 28 percent away from the record $8,940 a metric ton reached in July 2008. "Theoretically, it does have a spot in portfolios, a small one," Bublitz said. "You’re probably going to get entry points that are a lot better than where gold is now."

The dollar hit a one-month high against a basket of currencies, as investors stepped up bets that improved labor market data may prompt the Federal Reserve to lift key interest rate sooner than previously estimated. Demand for the greenback is likely to continue until investors get a better assessment of the implication of a faster recovery in the U.S. labor market in terms of future actions by Fed on interest rates. That may come as soon as 12:45 p.m. EST, when Federal Reserve chairman Ben Bernanke speaks at Economic Club of Washington.

Early Monday in New York trading, the euro was at $1.4788 from $1.4846 late Friday. The dollar was at 90.07 yen, from 90.51 yen, while the euro was at 133.22 yen, from 134.37 yen. The U.K. pound was at $1.6347 from $1.6449. The dollar was at 1.0219 Swiss francs, from 1.0170 francs. The Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 75.981 from 75.788. During overnight trading, the Dollar Index climbed as far as 76.183, the highest level since Nov. 4.

The better-than-expected November non-farm payroll data released Friday fueled speculation that the Fed may begin signaling the end of ultra-low interest rates. "The market will be looking to Bernanke's speech to provide some clarity on whether the November payrolls release really has brought forward the first rate hike of the cycle and whether the dollar could be close to turning around," Jane Foley, a research director at Forex.com in London, wrote in a note to clients Monday.

For most of 2009, the paradigm in the currency markets had been that "good economic data was bad for the dollar" as investors, hopeful of a faster global economic recovery, snapped up growth-sensitive assets such as stocks and higher-yielding currencies, and shunned the low-yielding greenback. The Fed has has kept interest rates at near-zero to help pull the U.S. economy from its worst recession since World War II. Investors have focused on the language in Fed statements following recent rate-setting meetings, particularly its remarks that interest rates would remain low for an "extended period," to gauge when rates may be lifted again.

Ultra-low U.S. interest rates have weighed on the dollar, as investors use cheap dollars to fund bets in riskier assets, such as the euro and other higher-yielding currencies. "The reaction to Friday's jobs data, so far, appears to have been a catalyst for market participants to trim some of their risk on trades," wrote Brown Brothers Harriman strategists. "[Monday's] speech by Bernanke could damp some of that enthusiasm with the Chairman acknowledging the firm jobs data but warning that one month's number does not make a trend, that there are limited signs of inflation and still downside risks to growth," they wrote.

The much-smaller-than-expected drop in non-farm payrolls also stoked the debate of whether the recent links between the dollar and riskier assets to economic data. "Friday's strong jobs report significantly reduces the risk that the dollar will sell off sharply into year-end. However, we do not think that the release will mark a broader turning point for the U.S. currency and that risks will rise again early in the new year," Credit Suisse strategists wrote in a note to clients today.

Five high-ranking executives at American International Group Inc. said last week they were prepared to quit if their compensation is cut significantly by the insurer's government overseers, according to people familiar with the matter. The threat is the latest in the running fracas between AIG and the government's compensation czar, Kenneth Feinberg, who is charged with setting pay limits for top executives at companies receiving the most federal bailout money.

The AIG executives who notified the company they were prepared to resign include its general counsel, Anastasia Kelly, and the heads of some of its largest insurance businesses. Over the weekend, two of them changed their minds. The executives are worried that their 2009 pay will be clipped, and that they will be subject to even tougher restrictions in 2010, including a prohibition against collecting so-called golden-parachute severance payments that they are currently eligible for.

AIG's recently hired chief executive, Robert Benmosche, threatened to quit last month amid frustrations over limitations on pay for top AIG executives. He argued that if the government wants AIG to prosper and pay back its debts, it needs to hire and keep top talent. He subsequently agreed to stay. It doesn't appear that Mr. Benmosche had anything to do with last week's threatened departures, people familiar with the matter say.

AIG is 80% owned by the U.S. government, which has committed $182 billion in financial support to the firm. As one of the biggest recipients of government aid, AIG is subject to Mr. Feinberg's pay decisions. In October, Mr. Feinberg reduced 2009 compensation for AIG's top 13 employees by 57%, including limiting most base salaries to no more than $500,000. Those 13 executives were the ones who remained of the 25 top 2009 earners at AIG, whose pay Mr. Feinberg was ordered to review. The others left before the pay review began. Mr. Feinberg is currently working on pay structures for the next 75 highest-paid AIG employees. The five senior staff members who said they may leave fall into that category.

Mr. Feinberg is considering less restrictive compensation for those 75, as well as for the top 100 earners in 2010, according to people familiar with the matter. Mr. Feinberg and AIG are discussing a plan under which the firm could pay individuals more than $500,000 as long as it can show "good cause" for going higher. Some Treasury Department and Federal Reserve officials have urged Mr. Feinberg to ease up on the cuts. The five senior AIG executives indicated on Dec. 1, in written notices, that they're prepared to leave by year-end, say the people familiar with the matter. They are trying to preserve their ability to collect severance payments, these people say.

Ms. Kelly, AIG's general counsel, has been at the insurer since 2006 and was appointed vice chairman in January under former CEO Edward Liddy. Several people familiar with the matter say Ms. Kelly asked other employees to join her in indicating they were prepared to resign. Four executives agreed, and Ms. Kelly retained outside counsel to advise the group on their legal options, says one person familiar with what happened. A spokesman for Ms. Kelly says she didn't "instigate or encourage" the other four, but "only advised the other executives of what they needed to do to protect their rights" under AIG's executive-severance plan, and helped them arrange for outside counsel.

The other four executives are Rodney Martin, who heads one of AIG's international life-insurance businesses that is slated for an initial public offering or sale; William Dooley, who has been overseeing the financial-services division; Nicholas Walsh, vice chairman and head of AIG's international property-and-casualty-insurance businesses; and John Doyle, who heads the U.S. property-casualty business. Mr. Dooley's division includes AIG Financial Products, whose credit-derivative trades were the biggest reason for AIG's 2008 financial problems. The other four executives weren't involved in the problems that sank the company.

Over the weekend, Messrs. Walsh and Doyle rescinded their Dec. 1 notices, a person familiar with the matter said. Messrs. Martin, Dooley, Walsh and Doyle either declined to comment or didn't respond to requests for comment. According to terms of the severance plan, which was put in place before the government bailed out AIG, certain executives are entitled to severance benefits if they resign for "good reason," which includes significant cuts in their annual base salary or target bonus.

The provision applies to roughly two dozen individuals, says one person familiar with it. The five who said they might quit "gave notice that they believe they have 'good reason' to resign" under the provision, and they are "taking administrative action to protect their rights because of all the uncertainty" around pay matters, this person says. With the resignations of nearly half of AIG's top 25 earners in 2009, some of the next 75 highest earners will be bumped into the top 25 next year. That would subject them to tougher restrictions and make them ineligible for severance benefits.

Earlier this year, Congress imposed restrictions on firms receiving large amounts of federal aid, including prohibiting "golden parachute" payments to some top executives. Mr. Feinberg is expected to issue his determinations for AIG within the next two weeks. Government officials say Mr. Feinberg, who oversees pay at seven firms receiving large amounts of government aid, is in a tough spot. He's charged with both curbing pay and preserving the ability of the firms to retain key personnel.

On Saturday, joined by hundreds of friends, family and colleagues on a snowy December day in Yonkers, NY, we celebrated the life of Mark Pittman. Readers of The IRA who wish to express their thanks to Mark and show support for his family may make contributions to the Pittman Children’s College Fund, c/o Dr. William Karesh, 30B Pondview Road, Rye, NY 10580.

Bob Ivry from Bloomberg News gave a remembrance of Mark, including reading the letter that his daughter Maggie Pittman posted on zerohedge to dispel rumors that her dad might have been murdered. Some members of the zerohedge family thought that Mark was killed by the banksters for his diligent pursuit of the disclosure of the Fed’s many bailout loans to Wall Street firms.

Ivry also told a great story of how, when asked by a younger reporter why she should give Pittman her scoops instead of giving them to CNBC’s Charlie Gasparino, Mark replied: “I’m taller than Charlie and can see above the bullshit.” We miss Mark a lot.

Coming together with the friends of Mark Pittman ended a grim week. Many of us in the financial community were wading hip-deep through barnyard debris as we watched Federal Reserve Chairman Bernanke dodge and weave in front of the television cameras during his Senate confirmation hearing. We have to believe that Mark would have been pleased as Senators on both sides of the aisle asked questions that came directly from some of his reporting — and a few of our own suggestions.

To us, the confirmation hearings last week before the Senate Banking Committee only reaffirm in our minds that Benjamin Shalom Bernanke does not deserve a second term as Chairman of the Board of Governors of the Federal Reserve System. Including our comments on Bank of America (BAC) featured by Alan Abelson this week in Barron’s, we have three reasons for this view:

First is the law. The bailout of American International Group (AIG) was clearly a violation of the Federal Reserve Act, both in terms of the “loans” made to the insolvent insurer and the hideous process whereby the loans were approved, after the fact, by Chairman Bernanke and the Fed Board. The loans were not adequately collateralized. This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims on AIG itself for equity stakes in two insolvent insurance underwriting units. What more need be said?

As we’ve noted in The IRA previously, we think the AIG insurance operations are more problematic than the infamous financial products unit where the credit default swaps pyramid scheme resided. And we doubt that any diligence was performed by Geither and/or the FRBNY staff on AIG prior to the decision taken by Tim Geithner to make the loan. We’ll be talking further about AIG in a future comment.

Of interest, members of the Senate Banking Committee who want more background on the AIG fiasco, particularly who did what and when, need to read the paper by Phillip Swagel, “The Financial Crisis: An Inside View,” Brookings Papers on Economic Activity, Spring 2009, The Brookings Institution. We hear in the channel that Fed officials were furious when Swagel, who served at the US Treasury with former Secretary Hank Paulson, published his all-too-detailed apology. We understand that several prominent members of the trial bar also are interested in the Swagel document.

Last week the Senate Banking Committee spent a lot of time talking with Chairman Bernanke about why payouts were made to AIG counterparties like Goldman Sachs (GS) and Deutsche Bank (DB), but the real issue is why Tim Geithner and the GS-controlled board of directors of the FRBNY were permitted to make the supposed “loans” to AIG in the first place. The primary legal duty of the Fed Board is to supervise the activities of the Reserve Banks. In this case, Chairman Bernanke and the rest of the Board seemingly got rolled by Tim Geithner and GS, to the detriment of the Fed’s reputation, the financial interests of all taxpayers and due process of law.

Martin Mayer reminded us last week that the Fed is meant to be “independent” from the White House, not the Congress from which its legal authority comes by way of the Constitution. Nor does Fed independence mean that the officers of the Federal Reserve Banks or the Board are allowed to make laws. None of the officials of the Fed are officers of the United States. No Fed official has any power to make commitments on behalf of the Treasury, unless and except when directed by the Secretary. Given the losses to the Treasury due to the Fed’s own losses, this is an important point that members of the Senate need to investigate further.

The FRBNY not only used but abused the Fed’s power’s under Section 13(3) of the Federal Reserve Act. In AIG, the FRBNY under Tim Geithner invoked the “unusual and exigent” clause again and again, but there is a serious legal question whether the then-FRBNY President and the FRBNY’s board had the right to commit trillions without any due diligence process or deliberate, prior approval of the Fed Board in Washington, as required by law. The financial commitments to GS and other dealers regarding AIG were made always on a weekend with Geithner “negotiating” alone in New York, while Chairman Bernanke, Vice Chairman Donald Kohn and the rest of the BOG were sitting in DC without any real financial understanding of the substance of the transactions or the relationships between the people involved in the negotiations.

Was Tim Geithner technically qualified or legally empowered to “make deals’ without the prior consent of the Fed Board? We don’t think so. Shouldn’t there have been financial fairness opinions re: the transactions? Yes.

We understand that the first order of business in any Fed audit sought by members of the Senate opposed to Chairman Bernanke’s re-appointment is to review the internal Fed legal memoranda and FRBNY board minutes supporting the AIG bailout. These documents, if they exist at all, should be provided to the Senate before a vote on the Bernanke nomination. Indeed, if the panel established to review the AIG bailout and related events investigates the issue of how and when certain commitments were made by the FRBNY, we wouldn’t be surprised if they find that Geithner acted illegally and that Bernanke and the Fed Board were negligent in not stopping this looting of the national patrimony by Geithjner, acting as de facto agent for the largest dealer banks in New York and London.

The second strike against Chairman Bernanke is leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had “no leverage.” Again, this goes back to the issue of why the loan to AIG was made at all. Having made the first error, Bernanke and other Fed officials seek to use it as justification for further acts of idiocy. Chairman Dodd look incredulous and replied “you are the Chairman of the Federal Reserve,” to which Bernanke replied that he did not want to abuse his “supervisory powers.” Dodd replied “apparently not” in seeming disgust.

We have been privileged to know Fed chairmen going back to Arthur Burns. Regardless of their politics or views on economic policies, Fed Chairmen like Burns, Paul Volcker and even Alan Greenspan all knew that the Fed’s power is as much about moral suasion as explicit legal authority. After all, the Chairman of the Fed is essentially the Treasury’s investment banker. In the financial markets, there are times when Fed Chairmen have to exercise leadership and, yes, occasionally raise their voices and intimidate bank executives in the name of the greater public good. AIG was such as test and Chairman Bernanke failed, in our view.

Chairman Bernanke does not seem to understand that leadership is a basic part of the Fed Chairman’s job description and the wellspring from which independence comes. The handling of AIG by Chairman Bernanke and the Fed Board seems to us proof, again, that Washington needs to stop populating the Fed’s board with academic economists who have no real world leadership skills, nor operational or financial experience. Just as we need to end the de facto political control of the banksters over America’s central bank, we need also to end the institutional tyranny of the academic economists at the Federal Reserve Board.

The third reason that the Senate should vote no on Chairman Bernanke’s second four-year term as Fed Chairman is independence. While Bernanke publicly frets about the Fed losing its political independence as a result of greater congressional scrutiny of its operations, the central bank shows no independence or ability to supervise the largest banks for which it has legal responsibility. And Chairman Bernanke has the unmitigated gall to ask the Congress to increase the Fed’s supervisory responsibilities. As we wrote in The IRA Advisory Service last week:

“Indeed, if you want a very tangible example of why the Fed should be taken out of the business of bank supervision, it is precisely the TARP repayment by Bank of America. The responsible position for the Fed and OCC to take in this transaction is to make BAC raise more capital now, when the equity markets are receptive, but wait on TARP repayment until we are through Q2 2010 and have a better idea on loss severity for on balance sheet and OBS exposures, HELOCs and second lien mortgages, to name a few issues. Apparently allowing outgoing CEO Ken Lewis to take a victory lap via TARP repayment is more important to the Fed than ensuring the safety and soundness of BAC.”

One close observer of the mortgage channel, who we hope to interview soon in The IRA, says that given the recent deterioration of mortgage credit, it is impossible that BAC has not gotten its pari passu portion of the losses which are hitting the FHA. The same source says that using conservative math, FHA has another $75 billion in losses to take, with zero left in the FHA insurance fund. Worst case for FHA is double that number, we’re told. How could the Fed believe that BAC, which is the biggest owner of mortgages and HELOCs, is immune from this approaching storm? Because the Fed is cooking the books of the largest banks.

The observer confirms our view that trading gains on the books of banks such as BAC are due to the Fed’s open market purchases, which drove up prices for MBS and other types of toxic waste. In effect, the Fed’s manipulation of the prices of various toxic securities is giving the largest US banks and their auditors a “pass” on accounting write-downs in Q4 2009 and for the full year – assuming that MBS prices do not drop sharply before the end of the month.

Question: Is not the Fed’s manipulation of securities prices and the window-dressing of bank financial statements not a vioatlion of securities laws and SEC regulations?

Of note, in her column on Sunday about the widely overlooked issue of second lien mortgages, “Why Treasury Needs a Plan B for Mortgages,” Gretchen Morgenson of The New York Times writes that “Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks – the very same companies the Treasury is urging to modify loans that they service – have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets.”

Thus the Fed is not only allowing insolvent zombie banks to repay TARP funds before the worst of the credit crisis is past, but the “independent” central bank is engaged in a massive act of accounting fraud to prop up prices for illiquid securities and thereby help banks avoid another round of year-end write downs, the banks the Fed supposedly regulates. This act of deliberate market manipulation suggests that the Fed’s bank stress tests were a complete fabrication. Only by artificially propping up prices for illiquid securities can the Fed make the banks look good enough to close their books in 2009 and, most important, attract private equity investors back to the table.

What is really funny, to us at least, is that we hear in the channel that BAC is ultimately going to give the CEO slot to a BAC insider, consumer banking head Brian Moynihan, who testified before Congress on the Merrill Lynch transaction in November. Just imagine how the Fed Board, Chairman Bernanke and the Fed’s Division of Supervision & Regulation are going to look when, after all the hand wringing about aiding BAC’s CEO search by allowing the TARP repayment, the post is finally given to an insider!

Former colleagues describe Moynihan as a close associate of Ken Lewis. If the objective of forcing Lewis’ departure was change in the culture in the CSUITE at BAC, installing one of his trusted henchmen, in this case left over from the Fleet Bank acquisition, seems a retrograde step.

All we can say about the treatment of the BAC TARP repayment issue and the Fed’s handling of the supervision of large banks generally is that it is high time for the Congress to revisit the McFadden Act of 1927. In particular, we need to look again at making further changes to the Fed to ensure that it is entirely subordinate to the public interest and that never again will private financial institutions such as GS or BAC be in a position to dictate terms to the central bank. Whether you are talking about the loans to AIG or the mishandling of BAC’s TARP repayments, the Fed under Chairman Bernanke seems to have acted irresponsibly and contrary to the law.

For all of the above reasons, we think that the Senate should reject the re-nomination of Ben Bernanke and ask the President to nominate a new candidate as Chairman and also nominate two additional candidates for Fed governor to fill the other two long vacant seats.

China's top economic planners were meeting Monday in an annual session said to be focused on fine-tuning policies to ensure the recovery is sustained. The gathering in Beijing, headed by President Hu Jintao, began Saturday and was expected to wrap up later Monday with a pledge to keep in place stimulus policies aimed at preventing a relapse of the downturn, with adjustments to reflect mounting worries over excess investment in some industries, media reported.

A year after the country launched a 4 trillion yuan ($586 billion) stimulus package aimed at countering the impact of slumping exports, economists say they expect growth for the year to exceed the government's target of 8 percent. This year's meeting also was expected to include preliminary work on the country's next five-year plan, for the years 2011-2015.

Late last month, the country's policy makers indicated they planned to stick to stimulus spending and easy credit to ensure growth is sustained despite weakness in the US and other key export markets. The emphasis, however, is shifting to promoting consumer spending and private investment, rather than the state-led investment of this year's recovery program, which has focused heavily on construction of railways, roads and other public works, newspaper China Business News and other reports said.

China's economy grew 8.9 percent over a year earlier in the third quarter of this year, after dipping to a 12-year low of 6.1 percent in the first quarter, a stunning rebound from last year's slowdown. But the government has struggled to control the expansion of industries viewed as already overheated, such as steelmaking and cement. The rapid credit expansion has added to risks in China's banking sector, the Basel, Switzerland-based Bank for International Settlements warned in a quarterly report issued Sunday.

Apart from the easing of standards to allow banks to issue some 8.95 trillion yuan ($1.3 trillion) in new loans in January-October, up from a total of 4.2 trillion yuan the year before, future tightening of monetary policies might leave some projects short of funds before they are completed, leading to a buildup of bad loans, it said. Meanwhile, inflows of outside capital into the world's fastest growing major economy are adding to inflationary pressures, especially in real estate and stock markets, the BIS report warned.

Chancellor of the Exchequer Alistair Darling is considering a levy on bankers’ bonuses and this week may reverse a tax cut for Britain’s richest households in an effort to win over voters before next year’s election. Darling yesterday refused to rule out a tax on excessive bonus payments, although he pledged to hold back from measures that would harm Britain’s banks. He said that lowering the inheritance tax for the richest people is no longer a priority for the pre-budget report on Dec. 9.

"We are not going to be held to ransom by people who believe you can pay extremely large bonuses regardless of what’s going on," Darling told BBC television yesterday. "You have to be fair. You have to be reasonable. But you have got to keep an eye on what the long-term effects are." Darling and Prime Minister Gordon Brown are trying prevent bankers awarding themselves large bonuses while the entire British banking system is underpinned by public money. Tougher rhetoric against bankers and the rich is also helping Brown’s Labour Party chip away support from David Cameron’sConservatives ahead of the election.

Bank shares fell in London trading today. Royal Bank of Scotland Group Plc slid 2 percent to 33.95 pence, and Lloyds Banking Group Plc lost 2.3 percent to 54.73 pence. The FTSE 350 Banks Index declined as much as 1.4 percent, the biggest drop in more than a week. The pound weakened against the dollar and the euro. The British currency dropped to $1.6323 as of 12:16 p.m. in London, from $1.6474 at the end of last week. It weakened to 90.59 pence per euro, from 90.18 pence.

Darling said he has not yet seen bonus plans from government-controlledRoyal Bank of Scotland and that he has the power to veto any proposals he considers excessive. Darling has also said that he is opposed to punitive measures that would damage a bank’s capital position, making it less likely that he will introduce an industry-wide windfall tax. "It’s not a black and white world," Darling said.

Instead of the bonus levy, the BBC reported yesterday that the government may impose a one-year windfall tax. Other options may include a larger employers’ national insurance charge or a direct tax on investment banks, the BBC added, citing unnamed ministers and officials. "A 10 percent levy on bank profits would raise around 2 billion pounds," saidVince Cable, a lawmaker who speaks on Treasury matters for the Liberal Democrats. "This is a much more effective solution than a one off levy and recognizes the debt that the banks owe to the taxpayer."

George Osborne, the Conservative lawmaker who shadows Darling in Parliament, told the same program yesterday that he "wouldn’t rule out" a charge on excessive individual bonuses if his party defeats Labour in the election, which has to take place before June. An ICM Research Ltd. poll showed that the Conservatives are on course to obtain a majority of between 20 and 25 seats in the 646-seat House of Commons. A ComRes Ltd. survey Dec. 1 showed that the U.K. may be heading for a hung Parliament where no party has an outright majority, with Cameron leading Brown by 10 percentage points, down 3 points from October.

Darling stepped up the attack yesterday, saying Osborne’s plea to voters to endure tougher times during the worst economic crisis since World War II isn’t consistent with tax cuts for the rich. Cameron is sticking to a similar inheritance tax plan. That strategy has helped Brown’s Labour Party erode Cameron’s lead in opinion polls. A YouGov Plc poll published yesterday showed that more than half of the 2,000 people interviewed viewed the Conservatives as the party of the rich. Cameron said Brown had been "spiteful’ in his efforts to tell voters of his privileged upbringing and elite schooling. "I really can’t believe it would be the first priority of any government, at this time, to give a tax cut to the top 2 percent of estates in this country," Darling said yesterday.

Darling said in 2007 that he would raise the inheritance tax threshold to 350,000 pounds ($578,000) from 325,000 pounds for single people and to 700,000 pounds from 650,000 pounds for couples, starting April 2010. Cameron’s Conservatives want to abolish the tax for single people with estates below 1 million pounds and for couples with estates below 2 million pounds. "If the Labour Party wants to say don’t aspire to get on in life, then so be it,"Osborne said. "It’s part of their lurch to the left."

Darling said this week’s pre-budget statement will spell out some detail on how he plans to implement his pledge to reduce the deficit by as much as half over four years. In the April budget, the Treasury forecast a shortfall of 175 billion pounds in the year through March 2010, or 12.4 percent of gross domestic product -- the largest in British postwar history. Darling told the BBC yesterday that he will scrap a 12.4 billion-pound computer program for the National Health Service that is being developed mainly by iSoft Plc. Similar reductions, rather than staff cuts in schools and hospitals, would indicate "the direction of travel" in this week’s report, he said. "The NHS had quite an expensive IT system and I don’t think we need to go ahead with it now," he said.

Brown said today the government will cut spending by more than 12 billion pounds in the next four years through efficiency gains. Ministers had found 3 billion pounds of new savings since April, including 1.3 billion pounds by "streamlining" central government, he said in a speech in London. Brown said on Dec. 4 in his weekly podcast that a plan to move more government services online would save about 400 million pounds a year.

Today, he promised to reduce the pay bill for senior civil servants by 20 percent over the next three years, and said that more civil service jobs will be moved from London and the southeast of England to parts of the country where living costs are lower. The government will halve spending on consultants and cut its marketing budget by a quarter, Brown said.

For the past three years, Lisa Matthews has never missed a mortgage payment - handing over $292, like clockwork, every week. But if nothing changes, a bailiff, acting at the request of her mortgage lender, will ring her doorbell and tell Ms. Matthews, her two daughters and her boyfriend to vacate the two-storey house for good.

"This was a pure slap in the face," said Ms. Matthews, a 36-year-old clerk with the City of Hamilton, who was recently told that, despite her perfect payment record, her mortgage will not be renewed at the end of its three-year term. Ms. Matthews is one of many Canadians being abandoned by a breed of alternative lenders that have stopped lending to customers, who, because of poor credit scores, lower-paying jobs, or minimal home equity, couldn't obtain financing from a raditional lender, such as a bank.

Everyone from the chief executive officer of Ms. Matthews' lender, Xceed Mortgage Corp., XMC-T to senior officials in Ottawa, agree that borrowers such as Ms. Matthews, who have dutifully paid their mortgage bills, are being unfairly stranded. What they can't agree on is how many Lisa Matthews are out there.

Records obtained under the Access to Information Act show that a lobby group representing these lenders has warned the federal government that, unless taxpayers offer help, they will be forced to foreclose on as many as 30,000 homeowners over the next three years. These "orphaned mortgages," as the industry is calling them, are held by customers who have impeccable payment histories. But they can't be renewed because the credit crunch has shut off the funding pipeline of non-bank lenders, the lobby says. This wave of forced sales and evictions will hit its crest this coming year when nearly half of these mortgages - most of which were issued during the real estate boom of 2007 - will not be renewed, the mortgage companies say.

Executives with alternative mortgage companies say they cannot renew the stranded mortgages because the once-thriving securitization market that attracted investors to these risky - and lucrative - mortgages collapsed in the wake of the U.S. subprime mortgage crisis. To replace the lost pool of capital, lenders are asking the federal government to back a special billion-dollar fund that would renew the healthy mortgages of borrowers who do not qualify for loans from traditional lenders.

Finance Department officials, however, have responded to the lobby group's alarm bells with caution and questioned their estimates, according to sources close to the negotiations. These sources say Ottawa is frustrated that some of the companies in this small segment of the Canadian mortgage market have been unwilling to hand over data so the problem can be fully assessed, one source said. "The government thinks this group is asking for help for itself," said the official close to the talks, which bogged down this summer. "Had they been willing to co-operate with the government and provide that information, some sort of program could have been designed. But you can't design a program on anecdotes."

The roots of the problem can be traced back to the housing and lending heyday of half a decade ago, when an assortment of "non-conforming," or subprime mortgage lenders launched operations. Some, such as Xceed and Mississauga-based N-Brook Mortgage Group Inc. had roots in Canada, and others, such as San Diego-based Accredited Home Lenders, migrated from the saturated subprime market in the United States.

Many of these mortgage companies aren't federally regulated so, unlike a bank, they aren't required to insure mortgages when the down payment is equal to less than 20 per cent of the value of the home. And unlike banks, they could - and often did - give loans to people who couldn't afford a down payment. After extra fees were piled on, some of these mortgages added up to as much as 104 per cent of the value of the house being purchased. Interest rates hovered as high as 11 per cent. Within a few years, this sort of lending started to explode and the new players quickly took hold of 5 per cent of the Canadian market.

But when the financial crisis struck last year, and "subprime" became a dirty word, the pension funds and investment banks that these companies relied upon to fund their mortgages, spurned them. Investors that previously had a ravenous appetite for securities backed by high-risk mortgages were now demanding their money back from companies like Xceed. These investment windows are closing at a time when thousands of mortgages, like Ms. Matthews' loan, are coming due.

Few of the low-income borrowers who were targeted by alternative lenders gave much thought to where their mortgage money was coming from. "The way we understood it, as long as our mortgage was paid, they would just renew it. The joke was on me," said Joyce Marentette, a cook in Chatham, Ont., who was also told last year by Xceed that she would have to find other financing, when her three-year term came up.

The problem is more acute in depressed areas such as Southwestern Ontario and parts of Alberta, where there are fewer private financiers and property values have sagged, industry insiders say. Mortgage brokers in Ontario cities such as Windsor, Chatham and St. Thomas say they regularly receive frantic phone calls from homeowners who are shocked to receive a letter explaining that their mortgage won't be renewed.

"We're not talking about a scoundrel that brought it upon himself. ... These are people that didn't do anything wrong," said Joel Katz, a Windsor mortgage broker. Mr. Katz said he believes the issue isn't on the government's radar because this type of lending accounted for such a small segment of the market compared with the United States. "The problem wasn't as big here, and there are people who are getting stepped on and overlooked."

But exactly how many people are being "stepped on?" Public records in Canada are so scarce, it's impossible - even for lawmakers - to know for sure. Ottawa relies on Canada Mortgage and Housing Corp. for data, but because none of these subprime players insured their mortgages through CMHC, the public agency knows very little about their state of their books. One source close to the Finance Department said officials at the Crown corporation figure that stranded borrowers account for only "a tiny sliver" of the country's homeowners.

Paul McGill, president of mortgage provider N-Brook and spokesman for the mortgage lenders lobby, argues Ottawa is understating the problem. He said he has supplied federal officials with data showing that $1.7-billion of healthy mortgages could be stranded and that these borrowers lack high enough credit scores to qualify for loans from more conservative lenders.

Mr. McGill said federal officials responded by asking mortgage lenders to supply extensive borrower details such as marital status and garage dimensions. Mr. McGill said the requests would have cost too much time and money to fulfill. Lenders have scaled back their proposal to call for a $1-billion Ottawa-backed fund that could renew stranded mortgages. He said Ottawa has not been supportive. In response to questions, the Finance Department issued a statement saying: "The government is monitoring housing and mortgage markets in order to ensure they remain stable, strong and competitive."

Far away from the push and pull in Ottawa, Ms. Matthews has put her house up for sale. A handful of prospective buyers has wandered through, but she has received no offers. A few weeks ago, she received a letter from Xceed's lawyers, explaining that she owes the company nearly $128,000. This means that, despite paying Xceed about $40,000 over the past three years, she now owes $1,000 more than she originally borrowed. When she opted to buy her first home, she had to get over the hurdle of her low credit score. An unpaid student loan had caught up with her. She had no down payment, and paid a 9.15-per-cent interest rate with Xceed. "I just thought they were my foot in the door," she said.

Ivan Wahl, Xceed's CEO, said his company has identified 1,100 borrowers that his company will maroon over the next three years. For those people "it is an absolute disaster," he said. Despite his sympathy, he says he is contractually obligated to pay Xceed's investors, which means demanding full payment at renewal time. "The government certainly should step up to the plate to provide some facilities for people who got caught in the crunch."

Ms. Matthews said she doesn't expect the government to do anything for her, and is reserving her frustration for Xceed. She said the companies involved should be giving their customers more warning about their inability to renew. She received a warning letter 31/2 months before her mortgage matured. "If I knew it was going to end like this, I never would have done it."

Bank of Canada Governor Mark Carney’s pledge to freeze record-low borrowing costs through June may be raising the chances of a bubble in home prices even as it helps the economy recover from its first recession in 17 years.

Sales of existing houses rose 74 percent in October from the January low, with prices up 21 percent from a year ago to a record C$341,079 ($323,203), partly because of Carney’s promise -- the only date-specific commitment from a Group of 20 central banker. To prevent the economy from overheating, Carney will raise his benchmark rate by 125 basis points to 1.5 percent in 2010, while Federal Reserve Chairman Ben S. Bernanke will keep his key rate at 0.25 percent, said Stephen Gallagher, chief U.S. economist in New York at Paris-based Societe Generale SA.

"The worry has got to be that you might be getting a housing bubble out of this," said David Laidler, a former visiting economist and special adviser at the Bank of Canada and now a fellow at the C.D. Howe Institute, a Toronto research group. Laidler is a member of the institute’s Monetary Policy Council, which studies central-bank decisions and said in a Dec. 3 statement that a "possible unintended effect" of Carney’s commitment is "the buoyancy of mortgage lending, particularly variable-rate mortgages, and the housing market."

For now, analysts at Toronto investment banks Scotia Capital and RBC Capital Markets are recommending investors buy shares of companies such as Home Capital Group Inc., even after the Toronto-based mortgage lender gained 166 percent since its 2009 low on Feb. 11 to C$41.75 as of 9:46 a.m. New York time. "The challenge right now is getting the economy going and dealing with any potential bubbles down the road," said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which manages about C$4 billion. Carney’s situation reflects the conundrum faced by policy makers who must weigh the trade-off between stimulating their economies now with ultra-low rates and dealing later with the fallout from unintended consequences.

"It is time to break the daisy chain of asset and credit bubbles and the global imbalances they spawn," Morgan Stanley Asia Chairman Stephen Roach told a conference in Vancouver Dec. 1. "If we fail, there may not be another chance." Carney, 44, has made it clear that stimulus is his priority. Only if the outlook for inflation shifts would the bank break its promise, he has said. "Rates are exceptionally low, they are exceptionally low for a purpose and we have given pretty clear guidance on how long we expect they will have to remain at these levels in order to achieve the inflation target," Carney told reporters Oct. 22. The bank projects the consumer price index, which rose at a 0.1 percent annual pace in October, will reach the target of 2 percent by the second half of 2011.

The central bank hasn’t talked much about house prices, "to the bafflement of international investors," said Eric Lascelles, chief economist and rates strategist with TD Securities Inc. in Toronto. The bank’s next opportunity comes tomorrow in an interest-rate announcement scheduled for 9 a.m. New York time. "It makes perfect sense that there is a good appetite for the housing market," Lascelles said. What isn’t clear is "whether this is a bubble in the making or simply a recovery from earlier softness." The New York-based Trump Organization, founded by real- estate developer Donald J. Trump, is building a 60-story Trump International Hotel & Tower in downtown Toronto. The residential condominiums sell for at least C$2 million.

Canada will be "one of the first markets" that "we’ll look at in the upswing," said Donald Trump Jr., 31, executive vice president of development and acquisitions. Canadians are jumping at "what they perceive as a once-in- a-lifetime opportunity," said Peter Gilgan, 58, founder and chief executive officer of Oakville, Ontario-based Mattamy Homes Ltd., Canada’s biggest homebuilder. The average five-year mortgage rate was 5.59 percent last week. In May it was 5.25 percent, the lowest since 1951 according to Bank of Canada figures.

Sales of existing homes will rise to 492,300 in 2010, up 7 percent from 460,200 this year, according to the Canadian Real Estate Association, an Ottawa trade group -- the second-highest total on record after 520,747 in 2007. Building permits jumped 18 percent in October, led by work on single-family homes and non-residential projects, Statistics Canada said today in Ottawa. The total value of permits issued by municipalities rose to C$6.12 billion, the most since September 2008.

The booming housing market partly reflects the strength of Canada’s financial system, which was named the soundest in the world for two consecutive years by the Geneva-based World Economic Forum. No banks collapsed or sought a bailout during the biggest global credit crunch since the Great Depression. In the U.S., the Treasury Department’s Troubled Asset Relief Program provided a total of about $205 billion in capital injections to banks, according to the department’s most recent report on Nov. 25.

Lending practices at Canadian banks have been more conservative than those of U.S. financial institutions, said Ivan Wahl, chairman and chief executive officer of mortgage provider Xceed Mortgage Corp. Subprime loans accounted for 5 percent at the peak of Canada’s market in the summer of 2007. Even in that segment, default rates are about 3 percent compared with 30 percent in the U.S., he said.

"We’ve never had the traumatic problems," said Wahl, whose Toronto-based company targets customers who have trouble getting mortgages with the largest banks. "We have one of the most constructive, positive and stable real-estate markets in the world." Canada’s economy shrank for three quarters starting at the end of 2008, one period less than in the U.S. Canada’s unemployment rate was 8.5 percent last month compared with 10 percent in the U.S. The 1.5 percentage-point gap was just under October’s 1.6 point difference, which was the widest since at least 1976.

The state of the housing market reflects "an element of pent-up demand," Carney told reporters Nov. 19. "Rates are exceptionally low, affordability has improved in part because of the low level of interest rates and part because of some former price adjustments, and we are seeing a housing-price response."

His view is shared by Peter Aceto, chief executive of Toronto-based ING Direct Canada, a unit of financial-services company ING Groep NV in Amsterdam, that has 1.6 million customers including 125,000 mortgage clients and C$33 billion in assets. "I don’t believe that there’s a bubble," he said. "Most stories I hear are just typical Canadians trying to buy their first home or move up."

Aceto said he is seeing some unusual signs, particularly in the Toronto market, where houses are getting as many as five offers at a time and prospective buyers are trying to woo sellers with personal notes or gifts. "When Canadians are waiving conditions and paying 10 percent more than asking for a home, it does give you some pause," he said. If policy makers are concerned about a possible bubble, they might look to tools other than interest rates to cool the market, said Brian Johnston, 51, president of Monarch Corp. in Toronto, the Canadian division of London-based Taylor Wimpey Plc, the U.K.’s largest homebuilder by market value.

"They might encourage lenders to be a little more circumspect in their mortgage qualifications; they may look at the amortization periods on mortgages," he said. "I don’t think they can control housing through fiddling with interest rates." Last year, the Department of Finance said Canada Mortgage and Housing Corp. would limit amortizations to 35 years and 95 percent of the loan value. The government’s housing agency had offered mortgage insurance on loans worth as much as 100 percent of the home value and amortization periods of as many as 40 years since 2006.

The strong market will help companies such as Brookfield Real Estate Services Fund, said Rossa O’Reilly, a financial analyst at CIBC World Markets in Toronto. O’Reilly raised his rating on Brookfield, which has about 14,500 brokers and agents under brands such as Royal LePage, to sector outperform in July, and in November raised the share target price to C$12.50. It traded at C$11.48 today. The fund is a subsidiary of Brookfield Asset Management Inc., which, along with Simon Property Group Inc., has purchased part of General Growth Properties Inc.’s bank debt and bonds and may make bids for all or part of General Growth, the Wall Street Journal reported last week, citing people familiar with the matter it didn’t identify by name.

Other industries will also benefit, notably appliance and furnishing manufacturers and retailers including Boucherville, Quebec-based Rona Inc., O’Reilly said. Shares of Canada’s largest home-improvement chain have returned 22 percent this year, lagging a 31 percent return for Canada’s benchmark stock index. Rona shares were unchanged at C$15.26 today.

Paul Lai, 55, and a dozen other real-estate agents camped out for 10 days along Toronto’s Bloor Street in late November for the chance to buy a home that won’t be completed for four years. "Where else is the world do you have agents lining up overnight to buy a condominium?" said Lai, with Tradeworld Realty Inc., a firm that has a sales staff of more than 200. He was bidding for a client on a condo costing as much as C$500,000. "We’re making history here," he said.

The government of President Hugo Chávez of Venezuela, facing a crisis at several banks acquired by his supporters, moved over the weekend to assert greater financial control by detaining one of the country’s most powerful financiers and forcing the resignation of the banker’s brother, who is a minister and a top Chávez aide.

The arrest on Saturday of the financier, Arné Chacón, and the removal of his brother, Jesse, as science minister, which Mr. Chávez announced Sunday, points to a broadening purge of a group of magnates known as Boligarchs, who built immense fortunes this decade on the back of close government ties. Their nickname is derived from the combination of Russian-style oligarchs and Simón Bolívar, the historical icon of Mr. Chávez’s political movement.

Besides Arné Chacón, Venezuelan authorities have detained several other bankers, including Ricardo Fernández Barrueco, a billionaire who went into finance after assembling a business empire that sold food to state-controlled supermarkets. All the bankers are believed to be under questioning by the Disip, Venezuela’s intelligence secret police. "We have been watching in awe at everything that has gone on over the past week, from the collapse and runs on the banks to the revolution eating its own," said Russell M. Dallen Jr., who oversees capital markets operations at BBO, a Caracas investment bank.

The crisis in the banking system began unfolding last Monday when the government seized control of four troubled banks, including those with ties to Mr. Fernández Barrueco, and then seized three other banks on Friday. Mr. Fernández Barrueco was arrested after he could not explain the origins of money used to buy the banks. Together, all the seized banks are estimated to account for less than 20 percent of the country’s banking system, dimming some fear that the crisis could infect other areas of Venezuela’s oil-based economy and easing concern of a Dubai-like debt crisis’s happening in Venezuela.

Still, Venezuelan markets were temporarily gripped by fear last week after Mr. Chávez threatened to nationalize the entire banking system if bankers did not obey the law. Capital flight fueled a plunge in the black-market value of the currency, the bolívar, and traders unloaded Venezuelan bonds before a reverse of panic selling on Friday.

Mr. Chávez, seeking to calm the population, said he was simply seeking to protect depositors. In his Sunday newspaper column, he reserved some vitriol for the arrested bankers, calling them "vulgar thieves, white-collar robbers, pickpockets." Mr. Chávez’s government still faces questions about the quick accumulation of fortunes by the arrested bankers, who drew deposits to their banks from deals with regional governments controlled by the president’s followers, leaving open the possibility that the purge could spread.

Bankers and economists in Venezuela also said it was not clear whether underlying financial problems at the banks had pushed the government to act. Depositors nervously lined up at some financial institutions in Venezuela last week in attempts to withdraw money, heightening concern over possible bank runs. The bankers embroiled in the scandal kept low profiles while expanding their empires. Arné Chacón, a former lowly army lieutenant, worked as a government tax official earlier this decade before quietly emerging as one of Venezuela’s top magnates, embarking on acquisition sprees that included banks, insurers and race horses.

Jesse Chacón, 44, also has a military background. He took part in Mr. Chávez’s unsuccessful 1992 coup attempt. Since Mr. Chávez’s rise to power 11 years ago, he has served as communications minister, justice minister and the president’s private secretary, before his most recent appointment as science minister. Mr. Fernández Barrueco, 44, forged ties with the government during a 2002 general strike by refusing to stop supplying food to grocery stores. Expanding into trucking and banking, his fortune reached $1.6 billion by 2005, according to an assessment by the Venezuelan affiliate of KPMG, the accounting firm.

The rise of these magnates had become a vulnerability for Mr. Chávez, who faced criticism from within his political movement over the seemingly unfettered operations of these decidedly capitalistic businessmen. For scholars of Venezuela’s economy, the emergence of such magnates has been a recurring feature of the country’s political evolution since oil became the dominant industry during the last century, with bureaucrats managing oil revenue and businessmen seeking lucrative government contracts.

This intermingling of state and private interests did not stop during Mr. Chávez’s government. Despite his efforts to assert greater state control over the economy, corruption in Venezuela is thriving by various measures. Transparency International, a Germany-based group that compiles a global corruption perception index, ranked Venezuela 162 out of 180 countries. "We’re now seeing a replay of this sudden-wealth mechanism, in which bureaucrats and businessmen become allies to capture oil revenues," said Pável Gómez, an economist at the Institute of Superior Administrative Studies, a Caracas business school. "Some of these players are now falling, but the system will allow other beneficiaries to emerge."

Consumer prices in Costa Rica fell by 0.16 percent during the month of November, marking the second time in 2009 that the country has experienced deflation. For the year, the inflation rate was at 2.57 percent, the lowest annual consumer price increase since 1972. At this point in time last year, the rate of inflation stood at 16.30 percent.

The largest decrease in consumer prices was felt at the gas pump, as the cost of gasoline fell more than 0.11 percent for the month. The price of gasoline is traditionally the driving force for fluctuation in the inflation rate, as the high inflation rate of 2008 stemmed largely from the high price of fuel. The overall cost of transportation has risen only 0.91 percent in 2009.

Average consumer prices also fell for car purchases, chicken, papayas and cable television. Increases in prices were seen in bus costs, sweet peppers, casados (a staple lunchtime dish featuring meat and rice and beans), home rentals and tourist packages. In September, the Central Bank of Costa Rica predicted the inflation rate for the year would reach between 4 and 6 percent. Barring a huge leap in consumer prices, those figures will not be met. The highest increase rate in 2009 was seen in July, when the consumer price index rose 0.92 percent.

The president's new mosque shimmers over this ancient city like an illusion of stability against images of MIG fighter jets screeching overhead toward rebellion in the north or the latest news of pirates seizing ships in the treacherous Gulf of Aden. In Sana's snug alleys, men speak of war, secession and Al Qaeda, which is busy scouring schoolyards and mosques for new recruits while much of the population spends hours each day getting a mellow buzz from chewing khat leaves.

If Yemen were a theater, which sometimes it appears to be, it would be an unnerving place of trapdoors and shifting facades. This is the poorest nation in the Arab world and one of the most strategically located, with 3 million barrels of oil sailing daily past its shores, tucked between Saudi Arabia and Somalia. And it is a teetering mess that some in Washington fear could draw the U.S. into a conflict with extremists at the intersection of the Middle East and the lawless Horn of Africa. "We are a failed state," said Abubakr A. Badeeb, a leading member of the opposition Socialist Party. "Yemen can no longer protect the rights of its citizens."

Others regard the country as a "failing" state, and the tricky thing about Yemen is parsing fact from fiction. Every scenario has a counter-narrative; every surface pulses with a beguiling underside. Is Al Qaeda a grave threat, or is its strength exaggerated by a government that needs U.S. attention and billions of dollars in aid from Persian Gulf nations? Is the war in the north a rebellion by a disaffected sect, or is it turning into a perilous proxy battle between Saudi Arabia and Iran, with the Saudis already launching military strikes across the border?

Yemeni President Ali Abdullah Saleh for almost 20 years has balanced conflicting tribal and sectarian voices, but his government's grip is slipping. Al Qaeda's aim is to exploit the economic crisis and domestic turmoil, overthrow the government and build a base for attacks across the region, Western and Yemeni intelligence officials say. Worried about terrorism and protecting oil supplies, the U.S. is working on a military cooperation pact with Yemen that includes training Yemeni special forces.

"Al Qaeda in the past focused on bombings and suicide attacks, but now it is also able to target security forces," said Saeed Ali O. Jemhi, an expert on terrorist groups in Yemen. "They have sympathizers and agents within the Yemeni security and intelligence forces. Al Qaeda is in a renewing stage, and its aim is to spread an Islamic caliphate across the Arabian Peninsula."

Washington's concern about Yemen has intensified since 2000, when militants slammed a motorboat packed with explosives into the U.S. destroyer Cole in the port of Aden, killing 17 sailors. The U.S. Embassy here in Sana, the capital, was attacked in 2008, leaving 19 dead, including a U.S. citizen. But non-military U.S. aid to Yemen has remained modest; this year totaling $24 million, up from $9.3 million the previous year. The Obama administration has requested about $65 million in counter-terrorism and military assistance.

It's a discomfiting task to choose Yemen's most pressing problem. Corruption is rampant, unemployment is 35%, child malnutrition is rising, water shortages are severe and oil reserves are shrinking. It says something about a country's priorities that most of its dwindling water supply goes to irrigating khat, whose bitter-tasting leaves have for generations kept Yemenis in a sedated haze. "Owing to the central government's historically weak control, the country has often been on the brink of chaos," said Christopher Boucek, an analyst with the Carnegie Center for International Peace. "Yemen has survived individual challenges in the past, but what differentiates the situation today is that multiple interconnected challenges are poised to converge at the same time."

The secessionist movement in the south threatens to split the country, but bombs and a surge of more than 175,000 people fleeing the war in the northwest is the consuming topic these days. There, Houthi rebels, Shiites of the Zaidi sect that had ruled for centuries, are battling Yemeni and Saudi forces along a border that stretches to the shipping lanes of the Red Sea.

The fighting, which began in August when the government launched Operation Scorched Earth, is the latest in a sporadic five-year insurgency. The Houthis say they are persecuted and marginalized, and they condemn Saleh, who is also a Zaidi, for being influenced by Sunni Wahhabi ideology from Saudi Arabia. The conflict, however, is rooted less in religion than in government failures and historical animosities in a mountainous region controlled by clans and tribes.

"The government hasn't offered jobs, education or development," said Mohammed Sabri, a political analyst. "The government thinks the war is a way to keep it in power. But they've chosen the wrong time and wrong place, and given the nation's circumstances, the war is spinning out of their control and they're trying to turn this businessmen's war into a proxy war." The Shiite and Sunni sectarian overtones have given the hostilities wider regional implications. The government says the Houthis are supported by Shiite-majority Iran. Tehran has denied the charges and the Yemeni regime has offered no credible evidence to back its assertions. Saudi Arabia joined the war in early November after cross-border raids by Houthis.

Riyadh fears two scenarios: The uprising will inspire unrest among the country's persecuted Shiite minority near its eastern oil fields, and that it will create a porous border for Al Qaeda militants to enter the kingdom to attack oil depots and government institutions. A Saudi militant based in Yemen slipped into the kingdom in August and blew himself up at a palace reception. Saudia Arabia's top counter-terrorism official, Muhammad bin Nayef, a member of the royal family, was injured. The attack reaffirmed to the kingdom, Yemen's biggest aid donor, that its southern neighbor was too strategically important to let it spiral into anarchy.

Politicians and clerics in Saudi Arabia and Iran have traded scathing rhetoric over Yemen, but so far the countries have avoided increasing military tensions. The kingdom is suspicious of Iran's ambitions, nuclear program and connections to the militant groups Hamas in the Gaza Strip and Hezbollah in Lebanon. Iranian Foreign Minister Manouchehr Mottaki recently issued a veiled warning over the Saudi intervention in Yemen, saying that "those who pour oil on the fire must know that they will not be spared from the smoke that billows." What's perhaps more troubling in the prospect of a failed Yemen is the effect it would have on the unstable Horn of Africa, where pirates roam and Al Qaeda cells hunker beneath U.S. predator drones.

Recent reports suggest that Houthi rebels may be training in camps in Somalia and that African refugees and mercenaries have joined Houthi ranks. This raises questions about the ability of Yemeni security forces to deal with multiple threats from sea and land. "With the modest navy we have we're trying, but we need international help. Piracy is a serious problem for everyone," said Mohammed Abulahoum, a member of the ruling General People's Congress party. "The U.S. needs a success story in the region. Yemen is important and Washington could have that success with a lower price tag than you would think."

The Saudi navy is patrolling the Red Sea to prevent arms and fighters from reaching the rebels. Iran has warships off the southern coast to protect shipping lanes, it says, from pirates. The confluence of so many competing and dangerous agendas, Yemen is small but too big to ignore. "Somalia and the Horn of Africa," Jemhi said, "are to Yemen what Afghanistan is to Pakistan."

76 comments:

StoneLady - "A vast amount of grid investment would be required for the grid even to be able to continue carrying the power it does now, and ambitious expansion plans are pure pie-in-the-sky."

This was very astutely posted today with regard to Ontario Province. Is this not also true of the U.S. grid? (I bet yes!) And is this not just one of the "energy factors" that preclude any semblance of business as usual?

Assuming that the answer to the above query is yes, than the next OBVIOUS QUESTION is why don't those in leadership positions (especially on the so-called left)do a better job of presenting this critical information to the people?

There are certainly plenty of voices making light--or making fun of--any such assertions. Talk of "returning to growth" is still rampant all over the business universe. It is as if there was some underlying reason why those in political circles who GET IT are for some reason unwilling to make a comprehensive case publically. Meanwhile the fiddling continues while the oil burns and the debt builds.

There are still professionals and teachers, skilled thinkers and managers in education and business out here who have very little knowledge or conception of either the depth of our financial corruption and intractable debt, nor of the reality of peak resources.

BTW, could someone link to a good overview of the condition of the U.S. grid?

What is true for the Ontario grid is also true for most of North America. The capacity for reverse power flow is very limited, and the under-investment has gone on for years, so that a large amount of equipment is at or near the end of its design life.

If we had moved towards more distributed generation in a timely manner (ie 20 years ago), we would be much less reliant on power transfer and the transition would be much less painful. Now, because we won't have the money to invest in either grid infrastructure or new generation, we are going to experience a transition through deprivation.

come on guys, WE ARE ENTERING DEPRESSION II, the policies of the "green" "clean" groups and lawmakers have been at work for 20 years. We listened, and believed and followed the lies of the left and so now AMERICA has built no refineries, bankrupted domestic oil production and refused to dig for coal for 20 years. Instead we pay TERRORISTS TO GIVE US OUR LIFEBLOOD.

The old ENERGY grids are built, our FUEL HAS BEEN LEFT IN THE GROUND WHILE WE GROW FOOD AND PUT IT IN OUR GAS TANKS (CRAZY WHILE POPULATIONS ARE STARVING). This is where the left wing crazies want us. No oil rich millionaires. Evil.

But they love their CARBON BILLIONAIRES LIKE THE IDIOT GORE - no complaining about his big profits, IS THERE?

THE DATA IS WRONG PEOPLE, THESE GUYS LIED AND THE CLIMATEGATE EMAILS PROVE IT. WHERE IS MY STATERUN MEDIA ON THIS?

YOU HAVE BEEN SNUCKERED FOR 20 YEARS - THEY LIED TO STOP ANY PROGRESS OR CAPITALISM - THEY HATE IT - THEIR HOODS ARE OFF - THEY WANT US BROKE AND DEFEATED. HOW DOES IT FEEL? AND NOW THAT YOU KNOW, HOW DO YOU FEEL?

You don't have to pay $3 FOR GAS, $300 FOR ELECTRIC BILLS, THE LIARS MADE UP FACTS TO SCARE YOU AND MAKE A PROFIT FOR THEM.

Sorry lefties, you had it your way, now we drill baby drill. We dig coal and drill for oil in our seas (INSTEAD OF ALLOWING OTHER COUNTRIES TO DRILL THERE, IDIOTIC) and we form a FOOD CARTEL FOR THE MIDDLEEAST AND CHINA. Let them worry about our cartel for a change. Imagine your life with .60 a gallon gas and 75 dollar home electric bills.

Yeah, JUST THINK ABOUT HOW MUCH MONEY THEY STOLE FROM YOU AND GAVE TO ALGORE AND HIS BUDDIES....

So, instead of giving our enemies trillions in oil money, we begin to make money on oil and food, we become strong again, AND THE LEFT HATES THAT AND WILL LIE AND SHAME TO STOP IT.

While the great story showed how far we have to go and how much we need to pay to grid up green, the left will tell you there is no oil - so we have no choice,

It makes you wonder if a small scale [30-50 kw project] is worthwhile...something the size neighborhood...say 20-30 homes.Intermittent power it ten times better than no power,and the local infrastructure is in place..

The US domestic reserves are highly depleted. The peak for domestic production was in the early 1970s and there's nowhere to go but down, no matter how much drilling anyone does. It's a myth that the US is simply choosing not to use its own reserves. The biggest myth of the bunch has to do with unconventional gas reserves.

I don't doubt that people will look for new supplies domestically and internationally, although probably not any time soon, as the coming depression will lead to a temporary glut, and therefore much lower energy prices, on demand destruction. It appears very likely that global production of oil has peaked, and that natural gas is not far behind. The net energy cliff (taking EROEI into account) is even steeper than the downslope of Hubbert's curve would suggest, and the above ground factors associated with the depression will make even that harsh scenario seem optimistic.

Energy will be a huge issue going forward. Renewable power will be very valuable down the line, and the most valuable of all will be that which is adjacent to load. If it does not have to be grid-tied, so much the better. It's a great shame that the apparent value of renewable power has been low for so long while conventional energy was so cheap. Later we will wish we had developed it when we had the chance.

Community power is a great idea where a community can afford it. It could make the difference between a thriving community and a dying one down the line. Pooling resources with others, so that no one has to incur debt and everyone owns a share is the best way to approach such projects IMO.

Someone yesterday asked about the future of prices for small parcels of farmland, too-

My strong impression- is the both farmland- and community power - are both, ALWAYS- just a little too expensive.

Or we are made to believe so.

A major factor in my belief- I grew up listening to my father and his many brothers moan and groan over all the opportunities they had missed to buy land- all over the place- because, AT THE TIME- it had been "too expensive."

And, pretty much in every case- they regretted that perception later. If they had stretched their resources and taken the leap- they would have benefited immensely.

But at the time- all opinions and prognostications aligned to convince them they couldn't afford it.

That's why I now have 160 acres of land. Bought while in grad school. What grad student could POSSIBLY afford that??

As it happened- we paid it off completely. Then did remortgage it to finance a business; so we share title with the bank at this point. But- we're dug in very firmly here, and make our livings.

And NO one in their right mind would have suggested we take that risk in grad school. But we did.

I truly see community power in the same light. The numbers won't ever add up, using standard accounting. The pay-off is decades later- when you have power, and others don't. I have a farm. And power, as it happens; which we were also told would never pay off.

* Gold is a concentrated store of value- Roosevelt confiscated most of the gold from safe deposit boxes in failed banks- Gold is a good insurance policy as long as you never need it- Gold preserves wealth but never, ever buy it as an investment- The historical value of one ounce of gold in vestments:o A toga and shoes in BCE 20o Men's suit and shoes in 1913o Men's suit and shoes in 2009

* Goldless ways to store wealth:- Chickens and chicken wire- Wells with high quality hand pumps- Big Berkey- Grains, legumes and a ton of Crisco- Camping gear- Tumbleweed house on wheels and some strong oxen

* Several years of deflationary depression will give millions the chance to fall off the cliff; Up next, Slum Dog Trillionaire

* Today's homes are different and appealing; Mortgages are no longer being given for condos in Phoenix

* Fukoaka combines taoism and gardening; Doing stupid things is a human right; Steel is better than oil; ZhuZhu the hamster is made with heavy metal

* Lack of basic nutrition and sanitation is worse than lack of medicine; Lifestyle changes are the best health plan

* Jarod Diamond goes to the dark side; Swallows party line hook, line and sinker; Brilliant men don't age well and ought to confine themselves to greeting at Walmart; You're only old once; Embrace senility

* Jobs and houses are fatally wounded; The Fed's ability to affect monetary policy by printing has been reduced; Bernanke doesn't respond to this altered landscape; Green shoots appear confined to a greenhouse in the green zone

* The road to hell is paved with good intentions; Climate change and financial armageddon can't be stopped; If TSHTF only castles will be safe; Kiss your butt goodbye

* All life seeks best EROEI; We are hard wired to over-re-produce; The wealthy never help the poor in any meaningful way

* Snerfling Scenario™:- The Government can lower the boom slowly- Once the boom is lowered it will be re-raised and the sails re-furled

* The Jal Judgement™:- Relocate to avoid chaos- Stockpile to wait it out- Get skills for the afterworld

* The Flawed Analysis™: - Banking system is backstopped by government so can't collapse- Printing money can solve all problems- Credit contraction and over capacity are deflationary- Money printing is inflationary

* The PastTense Palaver™:- Doomsteaders won't survive doomsday- Other than mass poverty things will continue on as now- The govenment will extend and pretend

* The Way of the Wolf™:- Sell everything- Purchase 6-8 months worth of portable food, some camping gear and guns- When TSHTF move to Canada

* Ric's Recommendations™ to provide for your children:1) skills growing food, building shelter, and blacksmithing tools 2) appopriate education and books3) scientific method4) impecable ethics5) rudimentary medicine and sanitation6) defense7) insight into the true value of life in all it's forms8) how to live with death

* Stoneleigh to rent Colliseum in Portland to accomadate all interested in meeting her

I understand what you're saying, but there are times when a risk will work out and other times when it will kill you, and the trick is to know the difference. We were in a long term rising trend when you bought your land, although it may not always have looked that way at the time. That trend is set to reverse, with disastrous consequences for many. This time a financial risk is unlikely to pay off.

Having said that though, I do think people really undervalue having control over their own power supply. When deciding what is affordable, I wouldn't do it based on present power prices, or even present prices times two or five. I wouldn't value it in terms of money at all, but in terms of what essential functions that power could allow you to cover down the line.

Where money comes into it is in terms of financing the project in the first place. Basically I wouldn't go into debt to do it, but I would pool resources to pay for what would be an incredibly valuable piece of infrastructure in the future. It is worth spending a lot of money on a community power project, but borrowing that money means risking having someone simply take it away later.

All that I want to add is that most of the people that can do the work involved with building the infrastructures are retired or going to be retired.There is a reason why those skilled workers are retired. They are no longer physically capable of doing the work without killing themselves. Relying on the “retirees” to strap on a tool belt to reuse rusty skills would be tragic rather than a comedy.

Most people cannot reset their “clocks” after a power outage.

Most people are ignorant off all things electronic.

Most people are users not “mechanics.”

Catherine is a “run of the mill” user with the “run of the mill” knowledge.

A “run of the mill” person would not be trainable for most of the work required to set up, maintain, and operate a power grid.jal

Maybe it doesn't matter, so long as the debt you carry on your farm is manageable (or nil). We don't care that our home "value" has declined over the past two years - it ain't fer sale.

Sure, it cuts down on our theoretical mobility to have so many assets fixed in place, but it also reduces the number of scenarios that would force us to bug out. We're determined to bug in, absent an eruption of Mt. Hood.

Stoneleigh: "I understand what you're saying, but there are times when a risk will work out and other times when it will kill you, and the trick is to know the difference. We were in a long term rising trend when you bought your land, although it may not always have looked that way at the time. That trend is set to reverse, with disastrous consequences for many. This time a financial risk is unlikely to pay off."

Surprise! I agree. :-)

Yep, all true. The risks are a lot higher right now- but as you go on to say- it's all a lot more complicated than any simplistic treatment. Although I would stand by my statement that regardless of trends, the cost of land almost always looks out of reach. What happens next though, is critical.

Everyone really has to do their own thinking, is what it amounts to.

I confess Amber and Ric's lists have made me a little uncomfortable- because of the danger that quite a few folks will follow them- and not do their own thinking. I do list my own practices on my blog- but only as an introduction to greater complexity.

A quote I've cited here before, I think:

Errol Flynn, in "Captain Blood" -

"Faith, it's an uncertain world, altogether."

(for those FEW not familiar, this is as he is about to be sold as a slave in the Caribbean, when a few months before he was a respected physician.)

Thanks again Stoneleigh for giving me an education on the structural and policy issues around grid malinvestment. This is a special interest of Gail over at TOD as you know and your perspective may be of interest to Gail and I hope she reads your thoughts and offers feedback on the similarities with Ontario's southern neighbor. The US appears to be far behind Canada wasting precious resources on combating islamic insurgencies all over Asia and propping up insolvent banks instead of rebuilding our disorganized and aging grid. I see no options except trying to build individual and regional resilience . Trying to rebuild the national grid going into a depression seems an insurmountable task.

The Dubai situation is absolutely fascinating, as we watch it unfold in real time. I'm no market maven but I can read graphs, and I see that their bourse peaked in the third week of October, and has been on a steady slide ever since.

http://sms.dfm.ae/charts/Charts.asp?id=HG_MarketIndex&period=12WK

So, was it insiders bailing out ahead of the default - erm, "standstill" - news? Or did the defaulting companies suddenly find themselves cash-poor and credit-poorer the second that their fortunes began to wane?

This story we're being told about how the debt-repayment standstill is causing the market slide ignores the fact that the past two days' spectacular 12% fall represents less than half of the 26+% loss incurred since the October highs. So which is the tail, and which the dog?

Perhaps the most unsettling thing is Stoneleigh's prescience in picking Halloween - more or less arbitrarily - as the turning date for the global financial markets. And what better place for a first appearance than Dubai, the poster child for wretched excess fueled by cheap debt, fantasy, and greed?

I agree with both of you. The challenge to me is in assessing the probability that you can own the land free and clear and do something with it before you lose the (financial and physical) ability to get there. That requires a very individualized assesment. Its also important to realize that a family could easily be totally self sufficient on the right 5 acre plot. The homestead doesn't have to be big to provide what you need. That helps the price picture a lot.

I find Catherine’s reply instructive. Not the substance…but the feeling.

I think many people who predict a certain outcome of events (most often a negative outcome) look forward, in a way, to the event occurring. Not because they are doomsdayers, and not necessarily because they simply want to gloat with an “I told you so”. They simply see too many people in what they consider deep in denial and hope for a time when that denial can be dashed so that we can then roll up our sleeves and get to work on the problem with One Voice. Or something like that.

I don’t know the depth of Catherine’s research behind her opinions…but I know plenty of people personally who insist on similar opinions whose depth isn’t that great. And, honestly, it won’t really matter what happens in the future for most of these people. They’re never going to have a ‘come to Jesus’ moment. They will always insist that the dirty (enviros, leftys, religious right, neocons, a-rabs, Jews, etc.) were the only ones keeping the truth from being told and are behind whatever current hardship is being faced.

I know a few right-wingers who are almost jittery with the hope that there’s another Islamist attack in the US. Yes, partly so that they can bray “I told you so”, but partly also that it’ll temporarily shut the moonbats up and we can get back to the rightful business of kicking Arab butt.

I, too, am guilty of occasionally pining for $5/gal gasoline and $.30 khw electricity so that the “cheap ‘n plentiful is our birthright” fools I’m surrounded by will see the light.

But, alas, it probably won’t happen like that. Most will probably go down kicking and screaming (and shooting) that it was “the other” that brought this upon us.

Perhaps, like Professor Falken, it would be preferable to pick a nice quiet place near Ground Zero. Better to go in the first wave than be among the millions wandering about in the aftermath.

Crop production from the century pre-oil agriculture was less than now. One quarter to a third of production was used just to feed draft animals necessary to produce a crop.

Farmland came to be treated as nothing but a big sponge on which to pour chemical fertilizers, pesticides and herbicides which gave the big boost in modern production yields. The soil fertility was essentially strip mined and without the chemical inputs has been a reduced to less than pre-oil production yield. Soil remediation can be achieved through organic farming techniques but takes some years and the energy to do.

If people will still eat and petroleum based agricultural inputs become unavailable more land will be needed to produce fewer crops. Until a production offsetting human die off, increasing farm land values are still to be expected.

Optimist,What day is the event? I'm about 400 miles south of you. If it works out work-schedule-wise, I might be able to drive up and meet you. You can e-mail me at rwilliams23 at yahoo's DOT....

Greenpa,I confess Amber and Ric's lists have made me a little uncomfortable--because of the danger that quite a few folks will follow them--and not do their own thinking.

Ha! You made my day! (which consists of taking rocks out of soil). This is often impossible to explain or express to someone who's listening. Words are like Wei Wu Wei's fingers pointing to the moon--they're not at all what you mean. They're the bluntest knife in the drawer, but they're what we use to approach each other. You might try to laugh about it with someone, but that still doesn't mean they'll get it (and you may piss 'em off like what happened to you--or simply look like a blithering idiot, which is my specialty.) The only other option is to shut-up entirely, which my wife says for me is impossible....

This is something I find really, really hard about the internet. Conversation occurs between individuals, tailored to the moment, relationship and specific needs. The internet often seems more like unleashed egoes shouting in the wind than anything else. As far as anyone seeing my words as a recipe for a doomstead, if it's not already clear--I'm in the bottom 5% of this board where the least practical people hang out.

Really! I assumed it was Sarah Palin in drag, drinking heavily to celebrate the financial success of her book.

I think Stoneleigh let it through in order for us to realize just how many demented, rabid, angry Americans there are who will be (quite literally) foaming at the mouth to string up totally innocent people as things deteriorate. And I agree with her decision to post it. Not that that matters.

If the electric business goes down, Stoneleigh would certainly have a future as a therapist in an acute psychiatric unit. My ex-wife, a RN, was one 35 years ago, but Stoneleigh has amazingly unflappable skills in this area.

Amber: "The homestead doesn't have to be big to provide what you need. That helps the price picture a lot."

Absolutely. I will, though, pass on a bit of info here that I learned when looking for our place, 35 years ago. And it's not really a secret- but it helps to find this out sooner.

My ex and I were wandering around Minnesota telling bankers (there actually were no real-estate brokers then, in the areas we were looking!) we wanted "Oh, about 40 acres, with some woods, and some water on it, and a stream would be great."

Eventually, a very helpful banker basically said "kids, that's the most expensive piece of land you could ask for."

Short, I suppose, of beachfront in Waikiki.

"You've just described the piece of land everybody wants for their vacation home, or getaway. So you're immediately competing with doctors and lawyers, etc."

He went on, however, to give us a piece of advice that turned out exactly as he predicted.

"What you want to be looking for is a piece of plain farm land- a big piece. Sure, the price is higher, but it also has an income; you can rent the tillable acres out- your 40 acres with a creek and some woods will not make you a penny. The rent income can really help with payments and taxes.

"And; farmland is taxed at the lowest rate, and 'recreational' much higher. AND- somewhere on your plain farmland is a corner of "rough" land- which the farmer is selling you for peanuts, because he can't plow it. Guess what's on the rough land!? Some forest. And often a creek. If you want to, or need to, you can split the parcel later, and sell the tillable; keeping your "rough" packet."

Our parcel turned out to be- bare farmland, no buildings, 90 acres tillable, 20 pasture, approximately 50 "rough". Only customers looking were local farmers, interested in the tillable, so they were basically giving the 50 acres of mature hardwood away.

One variable for my above post that might sink it would be if a human population decline happened while petroleum based farm inputs were still available to maintain crop production, if so decreasing “eaters” would no longer support increasing farm land prices.

Bette Noire said...(yesterday)"I´m also struggling with spending more to acquire more property at the beginning and spending more of our capital, which will impact how many and how fast we´ll be able to make renovations , or waiting and hoping to acquire more later when our skills are more adequate. Any thoughts about the future pricing of small parcels of farmland?"

This is exactly my dilemma, too. I have a sizable amount of cash, but have decided to wait for bloated land prices to pop. I am lining up all the ducks now though: learning what skills I can; buying many of the tools I'll need now; finding suppliers for other items; practicing growing food on a rented property, and preserving (bought fruit); trying different composting techniques; worm farming; stocking my library; making several building plans (some of which will circumvent local resource consent laws, which can be both costly and time consuming) with a relative who is an architect, etc.

The alternative would be to buy land now that is quite remote.

I'm going to see how the next leg down unfolds, and make a decision some time within the next 12–24 months.

I read the Jared Diamond op-ed and I don't agree that he's lost his marbles. It's really just a rehash of some of his conclusions from Collapse, which are well documented. There's no question he's optimistic, and he's thinking within a certain timeframe, namely before resource limits become too economically limiting, but there's a reasonably argument that it's still a significant timeframe before we reach the point of collapse and that the sort of things he's advocating are a practical avenue for extending that timeframe and mitigating the negative consequences. His analysis in the book is based on anecdotes but also more nuanced; he dwells more on the tenuous balance that he's offering and the difficulty in achieving widescale positive pressure on corporations to act socially responsible in the long term. As I said, he's optimistic, but, speaking as a more fatalistic individual, I can still say he's not being unreasonable.

I certainly understand your concern, but I am glad she did. One really prompt benefit of the posting of Catherine's comment was StoneLady's reply at 10:19 which was excellent and good for all to see. Sometimes we need to be reminded of the mindset of the unabashed brainwashed, and hear a learned response.

I agree that when you can afford it, the cheapest per-acre price is to buy farmland with "rough" areas. In fact, we own about 40 acres of rough woods on a bluff that were cheap precisely because they were too steep to plow (and too rocky) and too hard to clear for cows. However, it has a great northern slope (cooling is more important than heating in AR - we're trying to avoid solar gain), has all the firewood and building material we could ever want and has enough flat on it to grow the food we will need.

My comment was tailored to those who would find the larger price tag of that kind of acreage (even if it is less per acre) prohibitive. You make a very good point for anyone with the money to do it - it is a much better buy.

Ric - I certainly gree about the imperfections of language, I often post something and then upon reflection realize I could have stated it much better. And BTW there is no "bottom 5%" on this blog IMO. (well, maybe a Catherine or 2) Your comments are much appreciated even though, as we yesterday, do not always agree.

TAE summary - "* Stoneleigh to rent Colliseum in Portland to accomadate all interested in meeting her..." I wish a dozen StoneLady's and Ilargi's were filling coliseums all over North America, maybe we could face our predicament with a lot more properly directed attention to detail, waste a lot less and salvage a lot more.

El Galileo - I can't help but wonder how a room full of your rabid foamers-at-the-mouth will react to the likes of Ruppert's COLLAPSE show. Hoping to see it when it arrives at Indy.

One item that must be clarified is the difference between TRANSMISSION and DISTRIBUTION systems. "Grid" has become a catch all and muddies the different challenges between T and D. We should think of the "grid" as High Voltage transmission and not the lower voltage wood-pole stuff that runs down your street or road (unless you're in the low rent districts).

IMO, transmission is in fairly decent shape based on current generation and flows. We are already seeing demand destruction; dire reports from NERC on system adequacy are now placid in tone.

Clearly transmission it is inadequate to shuffle solar from the southwest US to the Northeast or wind from the Great Plains to California. The type of infrastructure for such markets is mind-boggling and a doubt whether well ever see such a thing (like the Med Ring around the Mediterranean Sea). Over-laying the existing grid with UHV (765 or 1000 kV) present incredible problems for system operations, few of which are "solved" or solve-able. Further, who pays for this stuff? People that think we'll see that stuff any time soon are on drugs or are ignorant.

Smaller focus wind projects (maybe 2000 MW max, e.g., Minnesota or New York state) are do-able tying in with the existing grid because there is a lot of "base load" generation and it can accommodate the vagaries of the wind.

Distribution is where distributed resources (e.g., home PV, digesters, etc) lie and offer the best hopes. Much additional distributed generation would challenge the distribution system, as would plug-in hybrid cars.

IMO, "smart grid" is a cachet that is irresistible to the media. It carries a huge price tag which Siemens, ABB, GE, et. al., can foist on the rate payers.

You mentioned that gold would bottom early in deflation. Why is that? FB

To paraphrase Stoneleigh, when crunch time hits and people have to raise cash fast, it's not what you want to sell but what people want to buy that will change hands. And gold is very, very liquid .....once the price is set. So the gold will move very quickly from people caught in the jaws of deflation to people who are sitting a lot "prettier." And once the people who must sell their gold do, then the market will firm again.

NZSanctuary - I live in NZ also and am in a slightly similar situation:

House recently sold, mortgage gone, other debt almost nil, busy storing and gaining new skills - and well - not a sizeable lump sum of cash in reserve, but enough to currently get a little house and a quarter acre or so freehold in a cheaper, rural part of the country.

The complicating factors in my head are:

* We have been staying in a rural area with family for the past couple of months and have realised we all miss the familiar, bustling, creative community we left when we sold our house.

* We now realise the importance of the existing community we had there, and are keen to move back and rent there for a bit.

* We can't afford to buy anything freehold in that particular community. We would like to if we could, but that would require another mortgage. (Which we absolutely would not do.)

* I am worried (not sure how justifiably) about a NZ banking collapse somewhere down the track, and am nervous about having our 'nest egg' in the bank for too long ... however, loved ones will not countenance having the money anywhere but in a bank, despite my efforts to suggest we spread it round a bit more and keep some in hard cash.

So, I am thinking it may be a good idea to convert the money into hard assets/land sooner rather than later, rather than risk losing it in a banking collapse ... But that means we may miss out on the lowest property prices (I think?)

So we have some tough decisions to make about what type of land we want, how much, in what condition, and how close to the relatively expensive, but very interesting and alternative community we love ...

1) WASHINGTON (AP) -- President Barack Obama called for a major new burst of federal spending Tuesday, perhaps $150 billion or more, aiming to jolt the wobbly economy into a stronger recovery and reduce painfully persistent double-digit unemployment.

2) Gallup figures show Obama’s rating now stands at 47% – the lowest ever recorded for any president at this point in his term of office!!! Worst President Ever

3) CNN survey finds 84% believe the economy is still in a recession, and that pessimism is growing despite improved economic readings.

What a bunch of scarety cats! Catherine opines that one flavor of inbred poltical dynasty has America bent over reaching for her ankles, and suggests all out & all in for avaiible resources.A refreshing departure from academic essays on Canada electrical grid. Sorry, Stoney.Actually, discussions should focus on practical solutions that MAY enabe a jump start of our economy ~ utilization of NG, recovery of sanitaryWastes & gases, even a return to horse power ain't So auwful bad.I'm a farmer, grew up on one, worked the rigs on land & offshore, so the prospect of erecting a windmill now looks very bright. Available energyIs what we got. Let's make do with what we got & let blind greed die and fade away. What's needed is more cooperation, less backbiteing, and, make the attempt to return positive ideals looking foreward.Puffer

Bigelow said..."So perhaps here is Captain Obvious for a moment…If people will still eat and petroleum based agricultural inputs become unavailable more land will be needed to produce fewer crops. Until a production offsetting human die off, increasing farm land values are still to be expected."

If deflation continues and defaulting on debt continues to increase, it seems that fall costs vs cash should ensue/continue in the short term.

Greenpa said..."Everyone really has to do their own thinking, is what it amounts to."

This should be the case... but those who follow blindly will do so whether or not lists, suggestions or whatever are posted here – they would probably just look for answers put forth by some other person or group.

I also would once again thank you for all the work you two do to keep this discussion group operating.Catherine [the ideologue]is a good reminder of what we all face when attempting to do Real change,and education to what "reality"[with all its warts]is.

One nice thing about the incredible cross-section of folks we have here is a the ability to kick out ideas and have them evaluated by those whom have a wide variety of experience to kick out "this wont work and here is why" Here goes...

There exists lots of bigger gensets that are emergency use,and way bigger that what a citizen would want for their house...there is also available CHEAP .mil gensets roughly of the same [30-60kw].We all are of agreement its fuel supplies that are the killer for a "community"power system.My thought would be to get build a biomass reactor big enough to feed that genset....it would be stationary,close to acreage with wood that transport would be a minor issue...[the best feed base would be with biomass powered truck to haul feedstock]....think in terms of 200-300lbs dry wood /per 6hr.[day] of operation

Biomass reactor is cake to build.They were widely used in the Baltic states during ww2 when Nazis cut petro-chemical access.With modern designs,fabrication of the casements,filters,ect is short work.The nice thing is that after the reactor is built,you can plug any IC engine into it that has a carb...]I studied everything I could lay my hands on on biomass at one time .I know I could build one from scratch..cheap]There is a lot of stuff on the web now avalible for those interested,google "woodgas"and check youtube out...

One more project to think of...

I am getting a feeling all the happy talk about employment...was that ...Happy talk.... I think may be we are in on a "shelf"and sliding to the edge of a very bad place...and the cynical,dark side of me thinks that the closer we get to that bad place,the place where EVERYONE knows we are all well and truly"fu#ked" ,the greater the chance of those truly crazy ones in the governing class deciding they need something to blame the coming disaster on...lest they,the rulers be blamed,for letting things get soooo bad...

VK, has it occurred to you that this next "stimulus" looks just like the last...except the voices are becoming a little more strident,[worried,and desperate]This time they are aiming at all the "little" folks but here's a bet....the same guy ,one of the primary architects of gutting the financial regulations Larry[I am a fat asswipe]Summers will ensure that none of it gets to those who need it.I am sure that that mans job in this administration is to make sure that the interests of the wealthy remain the primary focus of all actions taken by our beloved.gov. To the detriment of everyone else...He is for the monied class above all else.

I wish I had gotten that little bit of advice a while back Greenpa...would have made a big difference in the way I set up things...

Jal,I am worried that you are right about the lack of true "Mechanics"and solid "Technicians"the ones who can BUILD things...like the pipefitter who in his spare time builds working steam engines,from scratch,machining all the parts on a small lathe he built himself...or "motorheads who can strip a engine down to parts,figure out how to jack the HP 50%,reassemble it and drive off...There is a class of people,who you don't see much of anymore who are the heart of a manufacturing economy.We,as a nation have discounted them and their skills nearly to the point of our own destruction I fear,as American pre-eminence in creating wondrous machines is not just based on engineers...it needs the ones who "makes it work"after the design come out...I know some engineers think otherwise...but I have seen skilled techs "teach" a few engineers...

We are losing "the ones who make it work"...and I don't have a answer...

Dormouse said..."So we have some tough decisions to make about what type of land we want, how much, in what condition, and how close to the relatively expensive, but very interesting and alternative community we love ..."

"the country's authoritarian regime over the past week seized most of its citizens' money and savings via a new-currency issue......The reports suggest that North Korean officials may be experiencing more difficulty than expected in using the currency issuance to collar the expansion of private wealth in the country.......Pyongyang announced Nov. 30 its decision to issue new currency and limit the amount of old currency that could be exchanged to the equivalent of about $40, based on unofficial exchange rates, a step that essentially scrapped all other private money."

Concerning the question of why gold would bottom early in a deflation.

@ El G

I understand the points you make (people needing money fast and selling what sells), but wonder about a particular problem of perception that we may have.

A few days ago, someone commented that from afar, successive mountain ranges, one 80 km distant and the next 120 km distant, are virtually indistinguishable. The point being that when we humans look at the future, events, even those separated by months and years, tend to push forward into our vision. We have difficulty distinguishing the time that will occur between future events.

Now back to gold. Why would many different people, in many different situations, need to sell their gold early in a deflation? Would not every effort be made precisely to draw out the process and avoid crashing the market? Are we not victims here of perceiving future events as crowding forward into the immediate future, when they could in fact be separated by years?

In short, I see your point but wonder if there is not a more technical argument to explain an early bottom.

The community I was talking about was the Newtown/Berhampore area of Wellington ...

Well, 'interesting and alternative community' was overstating it a bit! :) But certainly a strong alternative element - very creative place full of artists and musicians and crafters and activists and interesting entrepreneurs ... lots of community initiatives springing up, and really diverse - culturally and occupationally. Do you know it?

Unfortunately we realised today we probably can't afford to rent the kind of place we need in that area, either ... so we're formulating some new plans ...

Our moves and upheavals of the past few months - and now having some degree of freedom to choose where we go next - has really brought home to me how important the people and community aspect is to us in our long-term plan. I hadn't realised just how important.

Not in a practical network-for-survival way, but on a completely emotional level.

A refreshing departure from academic essays on Canada electrical grid.

I mention the Ontario grid only because it is representative of problems across the continent. Grid capacity is limited almost everywhere. Also, Ontario's FIT program is being seen as the future for renewable generation elsewhere, giving cause for optimism that we can transition easily to renewable energy and therefore do not have to worry about energy in general. This leads to a false sense of security, which is dangerous.

So, I am thinking it may be a good idea to convert the money into hard assets/land sooner rather than later, rather than risk losing it in a banking collapse ... But that means we may miss out on the lowest property prices (I think?)

This is exactly our situation in Spain. Out of our 200K in savings and cashed out retirement funds, I´d like to spend about 50K on a property with at least 1-2 acres and some outbuildings, but there are very few. Another 30-50K will be going toward renovations and infrastructure as we will be starting with a ruined stone farmhouse. I expect labor will get cheaper (certainly our own) as time goes on, but am concerned about the availability of solar panels, insulation, wind turbines, double glazed windows, etc. I figure we´ll be living on what´s left of the money for the rest of our lives if we can hang on to it in a banking crisis.

Meanwhile DH is worried about maintaining the lawn on that much land ;)

I couldn’t agree more that we have a real shortage of people who actually know how things work. It is much bigger than motors and power grids (although both are true) – we have a significant portion of the population who don’t know how to take real food and turn it into something edible. There are a lot of people in the USA who if given a basket of vegetables would have no idea how to turn it into something good to eat. There are even more who wouldn’t know how to create any of the animal products they consume on a daily basis (butter, cream, cheese, or any meats). These skills aren’t difficult, but they are being lost rapidly. The good news (I’m a silver lining kinda gal, in case you haven’t figured that out) is that it doesn’t take long to learn any of these skills and none are particularly demanding.

The reason I wanted to point out the other skill sets that are being lost is that they don’t get as much attention, but are ultimately more important to our collective survival. Knowledge of machining, assembly, basic principals of how things work and the ability to apply them are very important but it isn’t one of the big 3 (food, shelter, clothing). And yes, I realize that those skills can make some of the big 3 easier to get/create. They aren’t required though.

My day job is in manufacturing (engineering, I’m afraid) and I see the best and worst of it there. Some people work at a machine every day and don’t know the first thing about how it works. Others could take it completely apart and rebuild it in an afternoon. Many of the second group are close to retirement and I’m more than a little worried (as you are) about the greater implications of this group aging.

Re: Biomass reactors

That’s interesting – thanks for pointing it out. I have something new to learn about….

Now back to gold. Why would many different people, in many different situations, need to sell their gold early in a deflation? Would not every effort be made precisely to draw out the process and avoid crashing the market? Are we not victims here of perceiving future events as crowding forward into the immediate future, when they could in fact be separated by years?

I think once deflation picks up a critical amount of momentum, it could proceed far more quickly than we might imagine. Many people in the developed world, particularly in anglo countries, are quite close to the edge already in terms of the debt that they hold. It might not be long before they are forced to sell what they can to pay those debts, and to cover living expenses in the absence of additional credit, with spiking unemployment and with cutbacks in government benefits.

Further down the line, I think we will see a lot of upheaval in gold as in almost everything else. The paper gold market will be revealed as a Ponzi scheme, there may be rumours of counterfitting, there may be confiscation, 'informal trading mechanisms' may develop etc. It's difficult to say what the net effect of these impacts would be at any given time and in any specific place, but upheaval in general is likely to inspire those few who can still afford to do so to buy gold. IMO control of the supply is likely to end up in the hands of the very few, as has been the case through most of history.

That sort of eventuality is much more likely where there is in fact a significant amount of wealth to be controlled in that way. Russia did something similar, precisely because there was so much money under the nation's mattresses to be smoked out. Here people have virtually no cash savings. Those who have any savings at all tend to believe in the deposit guarantees, but most people simply have no savings. They depend on access to credit for their rainy-day money. The evaporation of credit, combined with the failure of deposit insurance will be more than enough to dispossess the middle class here. Fear of holding cash now will only strengthen that outcome.

I should point out again though that there are no risk-free options. Every choice you make will come with its own set of risks, and those will be different depending on where you live (since I expect many things that are now global to fragment). You will need to look at your own circumstances and decide which risks you can live with, and you will have to keep doing it frequently, as the answer will change over time. None of us can be complacent, probably ever again. Relative values will be all over the place in years to come, and people will need to weigh up changes in relative values with the transaction costs and transaction risks of switching from one for of wealth storage to another. This will be very difficult, and the chances of losing wealth will be very high. In a deflation, he who loses the least is the winner. We will be here trying to help, but we are not familiar with circumstances everywhere. Nevertheless, you can always ask a question here and there may well be someone else here from your neck of the woods who can answer it.

The broader TAE community can help each other a great deal. Where possible, we suggest trying to meet fellow TAE people in person, in order to help turn a virtual community into a real one as much as possible. We are doing this ourselves in different parts of the world - me on the west coast of North America and Ilargi in Europe. Contact us if you'd like to get together in Vancouver, Victoria, Seattle, Portland, France or the Netherlands.

I agree about the need for such skills, and I'm very happy for you that you have a great skill set. This will serve you and yours very well.

Both biomass and biogas can be very useful (depending on location and the availability of inputs), and both can easily be done on a community scale. In fact this is probably the best possible scale to do them on. Although high energy waste streams will become much less available as there is less energy around to waste, lower energy streams will still be there.

In places like China and India, household-scale biogas can provide an essential cooking fuel, but this potential is climate dependent, or at least seasonal elsewhere. Anyone who would like to do something useful could look into the potential for installing simple systems like that.

Another of those too-late ideas, but my pet favorite, is neighborhood area storage. Sort of a planned relocalization for renewables -- in each of those neighborhoods able to afford solar panels, a sodium-sulfur battery bank. The batteries would be maintenance headaches at the personal level, but a several MWh system could reliably serve a suburban neighborhood and minimize dependence on the grid. The concept has been around for decades now.

There are some competing technologies based on more exotic chemistries as well, but NaS is made up of dirt-common components, literally. The trickiest bit is a reliable beta-alumina membrane...

I'm back after a long time just lurking. Been very, very busy getting set up for more livestock and processing our harvest.

I'm just wondering why people haven't been mentioning animals as part of their doomstead or wealth holding ideas? (Maybe some have and I've just missed it. Yes my love I saw your chickens and chicken-wire post!)

Livestock can hold wealth and add wealth as well as contributing to the workability of a home/farm. (i.e. cows give you milk and calves...)

Stoneleigh ~ Ontario grid representitive of probles across the continet.....leads to false sense of secutity.

I would argue that certain features vary. Hydroelectric generation on smaller U S rivers is mostly nonexistant, gen equipment had been sold off to S America in favor of coal and now gas firedMeans. All those small sub stations were converted to automatic, paving the way to a privatizing of actual transmission lines....utility company's as I understand it don't even own theirDistribution lines. A situation similar to prision system here run for fun and profit, some interstateHighways have met the same fate. What needs our focus looking forward is employment. And not the war footing the bought & paid for leadership will\would have unless stepsTo wake em up are taken. A serious replace the infrastructure effort, creating employment, remains the only realistic option ~ what better time to shit can these rascals, forgive all debts, forget about financial usuery, get back to work making this hemisphere the beacon of freedom itCan, was, and could be again.Puffer

"Matt Yglesias says it's puzzling that Ben Bernanke isn't adopting a more expansionary monetary policy in order to jumpstart the job market. Brad DeLong says, "I am puzzled too." A bunch of other liberally inclined economists have said similar things recently.

I dunno. I guess I wish we could stop pretending to be surprised by this. Ben Bernanke may be a specialist in economic contractions, but he's also a mainstream conservative economist. And mainstream conservatives have always been more concerned with inflation than with unemployment. Likewise, they tend to be opposed to entitlement spending, opposed to serious financial regulation, and opposed to expanded consumer protections. And guess what? Bernanke is more concerned with inflation than with unemployment and he's opposed to entitlement spending, serious financial regulation, and expanded consumer protections.

This was all pretty plain several months ago, when virtually every liberally-minded economist supported Bernanke's reappointment. So what's the point of bellyaching about it now?

For what it's worth, I'm surprisingly bitter about this and I keep stewing over it. Maybe I'm just being an asshole. But I've been reading liberal economists yammer on for years about liberal economic policies, so when an actual opportunity came along to appoint a liberal economist to an important position it was really disappointing to see them all circle the wagons around Bernanke almost instantly. It felt like the worst kind of professional backscratching.

I guess I should get over it. But we all have our dumb little pet peeves to be bitter about, don't we?"

What Snuffy says losing about "the ones who make it work" is so sadly true. Those folks are still out there, but they cannot make it forever on their own. They need jobs.

For instance, my brother worked half his life refitting cargo planes for CDF to fight fires.

He is one of those folks who can fix anything and find a way to make or improve just about anything. He showed up to visit a farm I was at last summer. They were having problems with their tractor and a half dozen other things. In the back of his van my brother digs through his tools, "Yep!" He had the parts they needed. No problem to fix, no need to pay him. Within an hour, everything is back to form.

The trouble is, at some point even the government of Colombia didn't need any more old airplanes. Nobody, but nobody, is hiring someone with these kinds of skills. He's been chasing work for over two years now and it's only the constant supply of unemployment benefit extensions that keep him going.

I think, "One day every damn thing in this country will be broken. Then, folks will have to wake up and wonder who's gonna fix it?"

My brother just shakes his head emphatically, "Naaaaah! Most everything is broken already."

while I agree we have an antiquated grid system that has finally been acknowledged by the OPA and Hydro One when it comes down to winding capabilities in our generators, the Ontario government is moving expeditiously to quell this present situation where the grid is reasonably up to snuff. I have a 20 mgwt wind project going up predicated on the FIT approval currently going under the microscope and my main concern has been brought forward about the overheating issues of present generators that cannot back feed the loads after winding procedures. They are recommending that half the capacities of such generators can currently compliment projects submitting for grid capacities that are subject to TAT/DAT testings by hydro and the OPA.Standby approvals will be made by the OPA that are predicated upon hydro's upgrading generators that have a New order lag time of 1-2 years.Hydro's upgrades should employ many more workers and Onatrio's strict 25% domestic content of turbines, that's made in Ontario, has AAER of Quebec stepping into the fold in Tiverton and erecting a 1.5 mgwt turbine to grant access into the Ontario market with under AAER having to employ Ontario workers for a new plant here in Ontario.Most of the FIT projects under the approval process will be using AAER for there domestic content requirements and those turbines ordered overseas will have to be retrofitted within the next two years, no latter than Dec 2011 or else the domestic content will rise to 50%. So jobs will be created here in Ontario and these job will have ripple affects.Not Ripley!

while I agree we have an antiquated grid system that has finally been acknowledged by the OPA and Hydro One when it comes down to winding capabilities in our generators, the Ontario government is moving expeditiously to quell this present situation where the grid is reasonably up to snuff.

Grid capacity will be very limited for years. Even if we had no looming financial crisis, and Hydro One employed every line builder in the country, they couldn't finish the proposed transmission projects in the timeframe envisaged IMO, and that wouldn't even include the vital work that would have to be done at the distribution level. It would all take decades, and would cost tens of billions of dollars at least. As we move further into a depression, that will become more and more difficult given that there will be so many competing priorities.

Ontario has tremendous RE potential, but talk of running the province on it is extremely premature. It is unfortunate that there's such a mismatch between RE resource intensity, grid capacity and load. We could help matters by introducing locational nodal pricing, in order to provide incentives to build generation closer to load and minimize the need for bulk power transfer, but even that would only do so much.

Nut trees are essential for a doomstead. Nuts and seeds -- especially walnuts, hemp and flax -- provide essential omega 3s fatty acids. Also, omega 3s plant sources are found to a lesser degree in greens and some legumes/beans. Humans can live without consuming saturated fat and cholesterol (the latter only found in animal products), but we cannot live without consuming omega 3s fatty acids. Indeed, our livers produce all the cholesterol we need for synthesizing hormones, etc. For example, my total cholesterol (checked yearly) hovers around 150 although I haven't consumed any cholesterol foods for more than 15 years.

Some grains and beans contain fats as well. Oats, garbanzos (chickpeas) and soybeans come to mind. Hence, we don't need to consume animal products to include fats in our diets.

The book, "Nutrition Almanac" is a good source for finding the fat content of animal and plant-based foods.

I am with you on the bitterness that the "financial wizards" of this administration...It was pointed out to me in a very intense conversation with a friend that for instance...[It don"t matter..we will get screwed in this health care "reform" period so stop worrying and just admit we will be getting Fu#ked]

The ones "in charge" are not the ones elected.Remember the demonstrations,the rage,the phone calls to congress about the bailout?See how much good that did?....Yaa..thought so.

Work on the place .Save what you need.Cut yourself as free of the system as you can...cause it will hurt less when the support system starts to get wacky...

But remember.The who, the how,and whom made out like the bandits they are...

Farmer Amber said: "There are a lot of people in the USA who if given a basket of vegetables would have no idea how to turn it into something good to eat."

Good point. I was teaching chemistry (on Vancouver Island) and used an example of home canning to show the applicability of a physical process. I was shocked to find than not a single one of the students had any knowledge about or how to can fruits and vegetables. The same for jam making and other home making skills.

Obviously the parents of the students never were involved in such activities either.

All basic skills seem to have been lost by too many. God help these people.

I am happy to say where we live in France now, where virtually everybody knows and uses these skills. It seems to be a source of pride to "faire la confiture, etc."

I guess you don't buy into Al Gore's fear mongering( I don't) on global warming,such as your posturing on renewable's and the hidden costs to get them on stream.If the Ontario grid system is antiquated, then lets fix it. I agree you don't put the cart ahead of the horse and produce something and scramble to find a way to transfer it and utilize it all in the same motion.I have to tell you that all factions involved in Green Energies here in ONT. are in uncharted waters and are trying desperately to intermingle and mesh things together are they forge ahead with there mandate.I wrote a letter to my local MP yesterday stating that with an election just two years off, the Liberal gov't had better hope that there isn't a white elephant sitting on there doorstep if there mandate of grid expansion runs into a brick wall and implodes on there watch.This current tranche of the new FIT will be coming on stream by then and its remains a huge question mark as to when another tranche will be offered and how many generators will be retrofitted to accept the next tranche and to facilitate those projects that were give standby status prior to the up coming new bids of the FIT.Hydro and OPA are having great difficulties in dialog to quell these huge concerns and to get an answer as to when our local TS generator upgrade is coming or when an order to GE will be submitted remains in the dark.So I guess when we have all these ambiguities floating around , it causes gridlock and frustration on behalf of all parties involved as we all tread lightly in these uncharted waters.I think you might have some valuable insights to offer the OPA.They are in the learning process and what scares me as they reserve the right to change the rules of the game at a moments notice in midstream.There's been some shenanigans that have happened behind the scene's as some liberal hacks have profiteered from most favored status($$$$$$$$) and got backdoor sweetheart deals just before the closure of the RESOP program back in Mar.09.They got capacity locked up for 8cents/kwthr via there political channels, bastardized the true spirit of the SOP and split up there RFP 40mgwt project into 4 SOP's after selling the dirty bill of goods to the landowners as an RFP.That's illegal.When you have all these ambiguities,these crooked POS always emerge with suitcases of cash to get what they want to take advantage of something new.I don't think I'll be hearing from my MP on all of this.

thanks coyote for the feedback on my tumbleweed house idea. for some reason i had dismissed airstreams, but no longer! your (obvious, in hindsight) advice to spend less on a used rv was just the sort of common sense i was seeking. though i admit to having been temporarily swayed by the gmc here

http://bellingham.craigslist.org/rvs/1469121711.html

but, as tae summary implied, who needs an engine for your trailer when you have oxen or summat? i expect that a local strongman with a good set of teeth and a predilection for pulses will have do for now, per city ordinance nos. 167649, 168900 and 181539 regarding the regulation of animals.